Macroeconomics

Macroeconomics is the branch of economics that examines the relationships between aggregate economic variables. Its focus is on the study of economic phenomena within the entire economic system, looking at economic actors (businesses, consumers, the government) collectively rather than individually. Aggregate economic variables are measured at a broad level, such as consumption, public spending, production, and prices.

The difference between political economy and macroeconomics. Macroeconomics is concerned with real-world economic phenomena that affect everyone within the economic system (the macro level). It moves beyond the purely theoretical aspects of economics, studying, for instance, the overall response of households and businesses to changes in taxes, public spending, and import/export activity. Political economy, on the other hand, is a broader field that encompasses theoretical disciplines as well as macroeconomic phenomena.

The aim of macroeconomics

The main goal of macroeconomics is to construct an economic model capable of explaining the functioning of the economic system, known as a macroeconomic model.

The purpose of a macroeconomic model

A macroeconomic model is a formal, abstract, and simplified representation of the economic system at a specific point in history. It helps policymakers adopt the most appropriate and effective economic policies to achieve their governing objectives.

For this reason, there is no universal, general macroeconomic model applicable to every historical context and location.

Example: The economic model of Keynesian theory is entirely different from the monetarist model of Friedman. The economic variables in these models are placed in different cause-effect relationships, resulting in different explanations for economic phenomena and justifying different economic policies by governments or parliaments.

Economic theories and historical context

The study of economic systems has its roots in the early history of economic thought. Since the days of mercantilism and physiocracy, economists have sought a general explanation for the functioning of the economic system.

Why isn't an economic model universally applicable?

Each macroeconomic model focuses on the primary economic problem of its time, attempting to find a logical explanation for its underlying causes and a series of economic policy suggestions to address it.

Example: In the 1930s, the problem was exiting the economic crisis. In the 1950s, it was post-war reconstruction. In the 1970s, it was price inflation. In the 1990s, it was public debt, and so on.

Furthermore, at the same time, national economic systems face different problems.

As a result, explanations of economic phenomena are strongly tied to a country's historical context.

No macroeconomic model can provide a universally applicable, general explanation of macroeconomic phenomena.

Each macroeconomic theory is valid only in certain countries and within its own reference era.

Example: Throughout the twentieth century, various interpretive theories and models emerged from different macroeconomic schools (Keynesian, monetarist, etc.). In the 1930s, Keynesian macroeconomics developed to analyze the causes of the 1929 Great Depression and identify ways out of it. A few decades later, in the 1960s-70s, the primary economic problem became inflation, and monetarist macroeconomics emerged to study the causes of price growth.

The differences between macroeconomics and microeconomics

While microeconomics focuses on the elementary units of the economy (labor, goods, businesses, markets), macroeconomics analyzes the behavior of economic actors from a collective rather than individual perspective.

Example: Macroeconomics studies the aggregate demand of all consumers rather than the demand of a single consumer, the analysis of recession or expansion phases of an economy, price inflation, and unemployment.

Due to its practical orientation towards current issues and the present, macroeconomics is closely related to economic policy and societal problems.

Keynes's explanation

According to Keynes, one of the founding fathers of macroeconomics:

It is not possible to explain macroeconomic phenomena by solely observing individual behaviors, because the individual behavior of an economic subject differs from the collective behavior of its category (households, businesses).

A decision that is rational from an individual business's perspective might not be so from the collective standpoint of the business category.

The same distinction can be observed between the individual behavior of a consumer and the general behavior of the consumer mass (households).