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Macroeconomics |
Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole.1 Along with microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.
While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income).
Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.
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The first published use of the term "macroeconomics" was by the Norwegian Economist Ragnar Frisch in 19332 and before this, there already was an effort to understand many of the broad elements of the field.
Until the early twentieth century, the quantity theory of money dominated as the favored macroeconomic model among classical economists.3 This theory gives the equation of exchange:
The equation states that the money supply times the velocity of money (how quickly cash is passed from one person to another through a series of transactions) is equivalent to nominal output (price level times quantity of goods and services produced). Classical economists, such as Irving Fisher assumed that real income and the velocity of money would be static in the short-run, so, based on this theory, a change in price level could only be brought about by a change in money supply.4 This equation is the central foundation for the economic school of thought known as monetarism. The classical quantity theory of money assumed that the demand for money was static and independent of other factors such as interest rates. Economists questioned the classical quantity theory of money during the Great Depression when the demand for money, and thus the velocity of money, fell sharply.5
Until the 1930s, most economic analysis did not separate out individual behavior from aggregate behavior. With the Great Depression of the 1930s and the development of the concept of national income and product statistics, the field of macroeconomics began to expand. Before that time, comprehensive national accounts, as we know them today, did not exist. The ideas of the British economist John Maynard Keynes, who worked on explaining the Great Depression, were particularly influential.
One of the challenges of economics has been a struggle to reconcile macroeconomic and microeconomic models. Starting in the 1950s, macroeconomists developed micro-based models of macroeconomic behavior, such as the consumption function. Dutch economist Jan Tinbergen developed the first national macroeconomic model, which he first built for the Netherlands and later applied to the United States and the United Kingdom after World War II. The first global macroeconomic model, Wharton Econometric Forecasting Associates LINK project, was initiated by Lawrence Klein and was mentioned in his citation for the Nobel Memorial Prize in Economics in 1980.
Theorists such as Robert Lucas Jr suggested (in the 1970s) that at least some traditional Keynesian (after John Maynard Keynes) macroeconomic models were questionable as they were not derived from assumptions about individual behavior, but instead based on observed past correlations between macroeconomic variables. However, New Keynesian macroeconomics has generally presented microeconomic models to shore up their macroeconomic theorizing, and some Keynesians have contested the idea that microeconomic foundations are essential, if the model is analytically useful. An analogy is the acceptance of continuous methods in physics despite our knowledge of subatomic particles.
The various schools of thought are not always in direct competition with one another, even though they sometimes reach differing conclusions. Macroeconomics is an ever evolving area of research. The goal of economic research is not to be "right," but rather to be useful (Friedman, M. 1953). An economic model, according to Friedman, should accurately reproduce observations beyond the data used to calibrate or fit the model.
The traditional distinction is between two different approaches to economics: Keynesian economics, focusing on demand; and supply-side economics, focusing on supply. Neither view is typically endorsed to the complete exclusion of the other, but most schools do tend clearly to emphasize one or the other as a theoretical foundation.
In order to try to avoid major economic shocks, such as The Great Depression, governments make adjustments through policy changes which they hope will succeed in stabilizing the economy. Governments believe that the success of these adjustments is necessary to maintain stability and continue growth. This economic management is achieved through two types of strategies.
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