Macroeconomics (from the Greek prefix makro- meaning “large” and economics) is a
branch of economics dealing with the performance, structure, behavior, and
decision-making of an economy as a whole, rather than individual markets. This includes
national, regional, and global economies.[1][2] With microeconomics, macroeconomics is
one of the two most general fields in economics.
Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price
indexes 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 governments to assist in the
development and evaluation of economic policy.
Contents
1 Basic macroeconomic concepts
1.1 Output and income
1.2 Unemployment
1.3 Inflation and deflation
2 Macroeconomic models
2.1 Aggregate demand–aggregate supply
2.2 IS–LM
2.3 Growth models
3 Macroeconomic policy
3.1 Monetary policy
3.2 Fiscal policy
3.3 Comparison
4 Development
4.1 Origins
4.2 Austrian School
4.3 Keynes and his followers
4.4 Monetarism
4.5 New classicals
4.6 New Keynesian response
5 See also
6 Notes
7 References
Basic macroeconomic concepts
Macroeconomics encompasses a variety of concepts and variables, but there are three
central topics for macroeconomic research.[3] Macroeconomic theories usually relate the
phenomena of output, unemployment, and inflation. Outside of macroeconomic theory,
these topics are also important to all economic agents including workers, consumers, and
producers.
Output and income
National output is the lowest amount of everything a country produces in a given time
period. Everything that is produced and sold generates income. Therefore, output and
income are usually considered equivalent and the two terms are often used
interchangeably. Output can be measured as total income, or, it can be viewed from the
production side and measured as the total value of final goods and services or the sum of
all value added in the economy.[4]
Macroeconomic output is usually measured by Gross Domestic Product (GDP) or one of
the other national accounts. Economists interested in long-run increases in output study
economic growth. Advances in technology, accumulation of machinery and other capital,
and better education and human capital all lead to increased economic output over time.
However, output does not always increase consistently. Business cycles can cause
short-term drops in output called recessions. Economists look for macroeconomic policies
that prevent economies from slipping into recessions and that lead to faster long-term
growth.
Unemployment
Main article: Unemployment
A chart using US data showing the relationship between economic growth and
unemployment expressed by Okun’s law. The relationship demonstrates cyclical
unemployment. Economic growth leads to a lower unemployment rate.
The amount of unemployment in an economy is measured by the unemployment rate, the
percentage of workers without jobs in the labor force. The labor force only includes
workers actively looking for jobs. People who are retired, pursuing education, or
discouraged from seeking work by a lack of job prospects are excluded from the labor
force.
Unemployment can be generally broken down into several types that are related to
different causes.
Classical unemployment occurs when wages are too high for employers to be willing to
hire more workers.
Consistent with classical unemployment, frictional unemployment occurs when
appropriate job vacancies exist for a worker, but the length of time needed to search for
and find the job leads to a period of unemployment.[5]
Structural unemployment covers a variety of possible causes of unemployment including a
mismatch between workers’ skills and the skills required for open jobs.[6] Large amounts
of structural unemployment can occur when an economy is transitioning industries and
workers find their previous set of skills are no longer in demand. Structural unemployment
is similar to frictional unemployment since both reflect the problem of matching workers
with job vacancies, but structural unemployment covers the time needed to acquire new
skills not just the short term search process.[7]
While some types of unemployment may occur regardless of the condition of the economy,
cyclical unemployment occurs when growth stagnates. Okun’s law represents the empirical
relationship between unemployment and economic growth.[8] The original version of
Okun’s law states that a 3% increase in output would lead to a 1% decrease in
unemployment.[9]
Inflation and deflation
The ten-year moving averages of changes in price level and growth in money supply
(using the measure of M2, the supply of hard currency and money held in most types of
bank accounts) in the US from 1875 to 2011. Over the long run, the two series show a
close relationship.
A general price increase across the entire economy is called inflation. When prices
decrease, there is deflation. Economists measure these changes in prices with price
indexes. Inflation can occur when an economy becomes overheated and grows too quickly.
Similarly, a declining economy can lead to deflation.
Central bankers, who control a country’s money supply, try to avoid changes in price level
by using monetary policy. Raising interest rates or reducing the supply of money in an
economy will reduce inflation. Inflation can lead to increased uncertainty and other
negative consequences. Deflation can lower economic output. Central bankers try to
stabilize prices to protect economies from the negative consequences of price changes.
Changes in price level may be result of several factors. The quantity theory of money
holds that changes in price level are directly related to changes in the money supply. Most
