Macroeconomics refers to the branch of economics dedicated to studying the behaviour of the larger-scale market systems that make up an overall economy. Phenomena that affect entire economies are studied in macroeconomics, including rates of economic growth, inflation, gross domestic product, national income, price levels, and rates of unemployment.
Microeconomics, on the other hand, focuses on individual goods and services markets and how supply and demand interact within those markets. However, microeconomics can still have an international scope, such as when looking at the oil and petroleum markets, for example, as these are single markets with a global scale.
Macroeconomics may still look at the petroleum industry but has more focus on how that market interacts with all the other markets rather than a single focus. A broader definition of microeconomics can be seen in the PDF attachment to this post.
Domen Zavrl has a PhD in Applied Macroeconomics and counts macroeconomic stabilisation policy among his key professional interests. Understanding macroeconomics requires the ability to look at big-picture scenarios for entire economies.
As macroeconomics looks at the entirety of an economy, modelling is used to help explain the relationships between all the different factors that affect that economy. Different types of macroeconomic models can then be used to develop forecasts and predictions, which can be used by large entities such as governments to aid in policy construction and evaluation; by businesses looking at both global and domestic markets to set strategy; and by investors to help them predict price fluctuations across a variety of asset classes.
Macroeconomics is concerned with issues that have high significance, particularly in the case of governments who are dealing with large-scale national budgets and must consider how all businesses and consumers will be impacted by any new or adapted economic policy.
Macroeconomic theories when properly applied can provide key insights into the long-term consequences that are likely to occur as a result of specific policy decisions and highlight how the economy is currently functioning. They can also help investors and businesses make better decisions as they gain a stronger understanding of the economy as a whole.
Macroeconomic Theory Limitations
Macroeconomic theory can provide great insights into economies, but it is not without its limitations. The complexities of the real world cannot all be factored into a mathematical analysis – variables such as social conscience or preference can cause fluctuations in the predictions generated by macroeconomic theories.
However, despite these limitations, following key macroeconomic indicators such as unemployment, inflation and GDP is still worthwhile, as these factors will retain significant influence over market performance despite the variables.
A definition of GDP can be seen in the embedded short video.
The Development of Macroeconomic Theory
Economic theory has been around for several centuries. Adam Smith, who authored ‘The Wealth of Nations’, has popularly been credited as being the ‘father of economics’ since its publication in 1776. However, for several centuries there was no micro- or macro- distinction.
It was around the time of the Great Depression that economists began to dismiss earlier economic theories and explore new possibilities. John Maynard Keynes published ‘The General Theory of Employment, Interest and Money’ in 1936, which introduced concepts such as ‘disequilibrium economics’. This publication would ultimately lead to the development of macroeconomics as a separate yet complementary approach to microeconomics.
In modern times, particularly since the 2008 financial crisis, there has been increased interest in developing fast-paced computer programs to improve macroeconomic modelling. More information about the causes of the 2008 financial crisis can be seen in the infographic attachment.