Fundamental Concepts of Macroeconomics

Fundamentals of Macroeconomics

Economics is the field that studies the production, distribution and consumption of goods and services. This may be on a global, regional or individual perspective. Depending on the field of study, economics can be divided into microeconomics and macroeconomics. In this article, we discuss some of the basics of macroeconomics.

What is Macroeconomics?

Many economists have attempted to define the scope of macroeconomics. P. A. Samuelson defined macroeconomics as “The study of the behaviour of the economy as a whole. It examines the over-all level of a nation’s output, employment, prices, and foreign trade” while J. M. Culbertson stated that “Macroeconomic theory is the theory of income, employment, prices and money”.

However, these definitions do not encompass the entire ambit of macroeconomics. A more cohesive definition can be found on Investopedia, which states that “Macroeconomics is a branch of economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena are thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment.”

Simply put, macroeconomics looks at economics on a global or national level.

Key topics in macroeconomics include business cycles (recessions and recoveries), fiscal policy, monetary policy, and economic growth and development. Macroeconomic metrics include GDP growth, money supply, and the unemployment rate.

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Income and Output

One of the basic concepts in macroeconomics is that of income and output. Everything a country produces in a given period of time is termed as the Gross Domestic Product (GDP) or the national output. As everything that is produced and sold generates an equal amount of income, the GDP or output is often equated with the total income or the sum of all value added in the economy for a defined period of time.

GDP is one of the measures used by economists to understand market swings and changes. One indicator commonly used is the output gap which is the difference between the actual output of an economy and the maximum potential output of the economy. The output gap is normally expressed as a percentage of GDP.

Other factors like human capital advances in technology, accumulation of machinery and education too affect the GDP. Economists look for macroeconomic policies that prevent economies from slipping into recessions and also policies that lead to faster long-term growth.

Inflation and Deflation

Inflation and deflation are much talked about topics in macroeconomics. Large changes in either direction are undesirable. Inflationary economic conditions occur when there is an increase in the price of goods and services across an economy while deflationary environments are those where the economy of a nation declines.  Economists need to understand the driving factors behind these environments in order to recommend appropriate measures to governments in order to curb adversity.

Unemployment

Unemployment in an economy is measured as the unemployment rate i.e. the percentage of workers without jobs. It is normally measured by the following equation:

Unemployment

Unemployment can be categorised as classical, frictional, cyclical or structural depending on the causes behind unemployment rates.

Macroeconomics policies: Monetary and Fiscal

The two main policies used by governments to stabilize national economies are Monetary and Fiscal Policies.

Monetary Policy

Central Banks implement monetary policies by controlling the supply of money through mechanisms like issuing money to buy bonds to increase the supply of money and lower interest rates or selling bonds to take money out of circulation. Another method that has been widely used in the recent past is that of quantitative easing to increase output.

Fiscal Policy

Fiscal policies are implemented by governments using revenue and expenditure as instruments to influence the economy. Government policies on taxes, expenditure and debt are all examples of fiscal policy measures.

Conclusion

As you can see, macroeconomics is an extremely broad field that has an impact on economies on global and national scales. Studying such a broad field requires a certain amount of dedication and instruction from knowledgeable professionals or experts.

You can learn macroeconomics as part of a formal education in commerce or economics from colleges. If you have already completed college or if you’re working and want to study macroeconomics at your own pace, you can explore online courses in macroeconomics developed by experts in banking and finance that encourage interactive education. Happy learning!


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