What is Macroeconomics and What is it for

Inside of economic science, understanding the concept of macroeconomics is essential, as well as useful, to analyze and project the economic developments proposed by the States. Also, to study and understand the entire economic policy of a nation.

Macroeconomics is a theory that studies and explains different factors or variables that together explain a wide-ranging and wide-ranging economic phenomenon.

What do we understand by macroeconomics?

Macroeconomics, as the name suggests, is the study of the economy from a global perspective. This means that all indicators or variables that in turn can explain an economic aggregate are taken into account. When we talk about phenomena or variables from the macro view we refer to aspects such as unemployment rate, inflation, productivity, money supply, etc. These, in turn, when investigated can explain an integral aggregate, for example, the level of growth of a given country, region or even the world.

This theory seeks to answer the whole. In this sense, when trying to explain the unemployment of a nation from an economic perspective, it is done taking into account its full projection. Not the elements that concern individuals; but only those that correspond to the total of the country. Following the example, macroeconomics would seek to explain and solve the general problem of unemployment in a country, without giving explanations about specific individuals.

However, the above does not suggest that macroeconomics does not affect people, quite the opposite. Its importance is such that the derived knowledge it generates serves as the basis for government decisions of a political, economic and social order. Likewise, to the decisions of institutions of international character with competence in regions that use macroeconomic tendencies to carry out projects, reforms and powerful laws.

A review of the history of macroeconomics

The birth of modern macroeconomics has been located in 1936 with the publication of the work of John Maynard Keynes, General theory of employment, interest and money, which is considered the first concrete postulate of the field of study of macroeconomics. However, this theory begins to have its first manifestations in previous decades where they begin to outline what would later be its object of study and methodology.

From the year 1665 William Petty and his work Political Arithmetick makes the first proposal to address economic research from systematic phenomena to understand the overall vision. In 1755 Richard Cantillón with his Essay on the Nature of General Commerce It tries to create an accounting methodology to measure the income of different economic sectors.

The modern macroeconomics

When World War I ended, it was soon seen that the capitalist economy during the first years of the 20th century would not be defined by growth and stability. Economic theories had to seek an explanation for inflation and the various financial problems that plagued many European countries and the US. During the time of the Great Depression, this country experienced a considerable rise in unemployment and a very low level of production. With that panorama, Keynes publishes his important work.

With a perspective completely contrary to that of the so-called neoclassical economists, Keynes explains that unemployment is involuntary, therefore, the capitalist economy must be regulated in order to achieve stability and better use of productive resources. In addition, he proposed government intervention in the creation of economic policies that promoted the general development of the nation and increased employment.

After Keynes and the popularity that unleashed his work, John T. Hicks Nobel Prize winner and article author Mr. Keynes and the ‘Classics’: a Suggested Interpretation (1937) created the IS-LL model where it shows how the markets and the money. This was a fundamental proposal for the Keynesian current and that would later inspire the mathematical works that would serve as an econometric technique for macroeconomic empirical studies.

Macroeconomics Characteristics

  • It focuses on the study of the economy from an overview to explain its operation through variables. These are related to each other and are not seen as isolated phenomena.
  • Among the characteristics of the macroeconomics, it stands out that it serves the integral behavior of the markets, not of their individual expression.
  • The analysis is based on the observation, collection and analysis of statistical data to compare with patterns of success or failure.
  • One of the most used indicators is the Gross Domestic Product (GDP) of a country or region, since its variations are considered to be a reflection of productive growth or decline.
  • Theories of macroeconomics are: of economic aggregates with the measurement of national accounts; of the economic equilibrium with analysis of prices, employment, goods market, etc., and of economic development with the study of cycles where currency, finance, production, among others intervene.

Macroeconomics Variables

The macroeconomic variables They are as follows:

  1. GDP and long term growth: This indicator allows us to understand the growth or recession of production in a certain period of time. Likewise, the speed or slowness with which the changes occur are considered.
  2. The productivity of a country and a region of the hand with its technical and instrumental development.
  3. Economic cycles: seen as movements where it is possible to determine the appearance of a trend, its reasons and the effects it will have on productivity and GDP growth.
  4. Unemployment rate: statistics on the amount of unemployment, as well as the unemployment rate.
  5. Inflation: understood as the progressive and sustained increase in the prices of consumer goods and services. Likewise, all the factors that promote the increase. In opposite cases, macroeconomics can consider deflation as an indicator.
  6. Public expenditure: Since the State is considered a determining factor within the economy of a country, variables related to its influence on economic developments, surplus or public deficit are studied.
  7. Public debt: all outstanding accounts of the State that affect its economic flow and, therefore, that of the entire nation.
  8. Interest rate: the one that is managed by banking institutions.
  9. Exchange rate: comparison of the value of the national currency and the foreign currency that serves as a paradigm, often the US dollar.

These are some of the most relevant variables, although not necessarily the only ones to evaluate.

The objectives of macroeconomics

  • Quickly raise the productive level: Or what is the same, quickly raise GDP. Of the most important objectives, it is understood that by increasing the level of national production so does the level of consumption of the average citizen. Greater quality of life and better opportunities for social and individual development.
  • Reduce unemployment and create new sources of work: Another objective of macroeconomics is to reach what is known as full employment. It is the lowest unemployment rate for a country according to its productive capacity and active population, that is, it is not that all people have a job, but that there are conditions and opportunities for the highest level of expression to be expressed. The workforce of that economy.

We must mention that these are two objectives to be sought together, as they are not equivalent. Lowering the unemployment rate does not necessarily create new sources of work and vice versa.

  • Stabilize the prices: Decrease inflation It is essential to avoid costs to companies and citizens. When there is high inflation, companies are affected by their production and for consumers, there is a depreciation of the purchasing power, therefore, of their quality of life. Inflation It brings serious social consequences such as the vulnerability of social sectors and the unequal distribution of wealth.
  • Reduce and avoid the fiscal deficit: When a State spends more than it receives, the interest rate increases, making private investment difficult. This, in turn, impoverishes the available sources of work and the availability of consumer goods for the population.
  • Balance the balance of debt payments: When there is an imbalance because of a country imports more than it exports, it must resort to external loans to try to solve the capital deficit. The accumulation of external debt will also, in the long term, be an impediment to economic development.
  • Stabilize the exchange rate: Achieving stability in the exchange rate is essential for the international relations of a country and for maintaining a low level of inflation. It happens that when an imbalance occurs, the State intervenes in the purchase and sale of currencies to avoid capital flight, a situation that promotes economic decline.

The importance of macroeconomics

Due to the nature of its objectives, it is correct to say that this theory has a huge impact on the economic and social future of countries. The creation of macroeconomic policy can create a difference for the development and productivity of an entire nation or region. Hence, governments use it to support their economic policies.

Its contribution is such that it allows to make projections, estimate trends and plan future strategies that help States in achieving their objectives and in the goal of giving people a better quality of life.

What is the difference between microeconomics and macroeconomics?

Unlike the macro perspective, microeconomics addresses the behaviour of individual economic elements, those that can be produced by groups of people or companies that have an influence on a specific market. While two separate branches may seem, the truth is that they are related in many ways.

In principle, because everything that is stipulated as the macroeconomic policy has a direct influence on people, companies and their respective markets. On the other hand, economic science has understood that to reach a global perspective of the economy the individual agents that belong to the sphere of action of the microeconomics should be considered. In this sense, the micro turns out to be, at present, the starting point of macroeconomics.

Some examples of macroeconomics

All government policies usually have a relationship with the macroeconomy. For example, the creation of laws that affect the increase in savings and social, environmental and economic growth of a country. Similarly, decisions on whether or not to devalue a currency or the most recent cases of accession or separation from the European Union, tax changes and the reduction of interest rates are representative applications of this important theory.

However, as a study methodology it can be manifested in more domestic examples, taking as analysis all the elements that influence our economic development and promoting a thought capable of adapting to future changes. In short, it helps us understand the risks and opportunities associated with the use of our budget.