Macroeconomics (from Greek prefix "macr(o)-" meaning "large" + "economics") is a branch of economics Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current that deals with the performance, structure, behavior Behavior, or behaviour , refers to the actions of an organism or system, usually in relation to its environment, which includes the other organisms or systems around as well as the physical environment. It is the response of the organism or system to various stimuli or inputs, whether internal or external, conscious or subconscious, overt or and decision-making of the entire economy An economy consists of the economic system of a country or other area, the labor, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area. A given economy is the end result of a process that involves its technological evolution,, be that a national, regional, or the global economy.^[1][2] Along with microeconomics Microeconomics is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and, macroeconomics is one of the two most general fields in economics Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current.

Macroeconomists study aggregated indicators such as GDP The gross domestic product or gross domestic income (GDI) is a measure of a country's overall official economic output. It is the market value of all final goods and services officially made within the borders of a country in a year. It is often positively correlated with the standard of living,; though its use as a stand-in for measuring the, unemployment rates Unemployment occurs when a person is able and willing to work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed. The unemployment rate is also used in economic studies and economic indices such as the United, and price indices A price index is a normalized average (typically a weighted average) of prices for a given class of goods or services in a given region, during a given interval of time. It is a statistic designed to help to compare how these prices, taken as a whole, differ between time periods or geographical locations to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product , gross national product (GNP), and net national income (NNI). All are specially concerned with counting the total amount of goods and services produced within some "boundary&, output Output in economics is the total value of all of the goods and services produced in an entity's economy. It is a concept used in macroeconomics, or the study of the economic transactions of broad groups such as countries, consumption Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined by opposition to production. But the precise definition can vary because different schools of economists define production quite differently. According to some economists, only the final purchase of goods and, unemployment Unemployment occurs when a person is able and willing to work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed. The unemployment rate is also used in economic studies and economic indices such as the United, inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit, savings Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is higher, investment Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management, international trade International trade is exchange of capital, goods, and services across international borders or territories.. In most countries, it represents a significant share of gross domestic product . While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on and international finance International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes the study of futures, options and currency swaps. International finance is a. In contrast, microeconomics Microeconomics is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and is primarily focused on the actions of individual agents, such as firms A business is a legally recognized organization designed to provide goods and/or services to consumers. Businesses are predominant in capitalist economies. Most businesses are privately owned. A business is typically formed to earn profit that will increase the wealth of its owners and grow the business itself. The owners and operators of a and consumers, and how their behavior determines prices In all modern economies, the overwhelming majority of prices are quoted in units of some form of currency. Although in theory, prices could be quoted as quantities of other goods or services this sort of barter exchange is rarely seen 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 In economics, the concept of the short-run refers to the decision-making time frame of a firm in which at least one factor of production is fixed. Costs which are fixed in the short-run have no impact on a firms decisions. For example a firm can raise output by increasing the amount of labour through overtime fluctuations in national income (the business cycle The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline (), and the attempt to understand the determinants of long-run In economic models, the long-run time frame assumes no fixed factors of production. Firms can enter or leave the marketplace, and the cost of land, labor, raw materials, and capital goods can be assumed to vary. In contrast, in the short-run time frame, certain factors are assumed to be file. This is related to the long run average cost (LRAC) economic growth Economic growth is a term used to indicate the increase of per capita gross domestic product or other measure of aggregate income. It is often measured as the rate of change in GDP. Economic growth refers only to the quantity of goods and services produced (increases in national income).

Macroeconomic models A macroeconomic model is a model or framework designed to describe the operation and activity in the economy of a country or a region. These models are usually designed to examine the dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labour market, national ownership, and many other areas of government interventions into the economy and business strategy.

Development of macroeconomic theory

The term "macroeconomics" stems from a similar usage of the term "macrosystem" by the Norwegian After World War II, Norway experienced rapid economic growth, with the first two decades due to the Norwegian shipping and merchant marine and domestic industrialization, and from the early 1970s, a result of exploiting large oil and natural gas deposits that had been discovered in the North Sea and the Norwegian Sea. Today, Norway ranks as the economist Ragnar Frisch Ragnar Anton Kittil Frisch was a Norwegian economist and the co-winner with Jan Tinbergen of the first Nobel Memorial Prize in Economic Sciences in 1969 in 1933.^[3] and there was a long existing effort to understand many of the broad elements of the field. It fused and extended the earlier study of business fluctuations and monetary economics Monetary economics is a branch of economics that historically prefigured and remains integrally linked to macroeconomics. It provides a framework for analyzing money in its functions as a medium of exchange, store of value, and unit of account. It considers how money, for example fiat currency, can gain acceptance purely because of its convenience.

Mark Blaug Mark Blaug is a British economist (naturalised in 1982), who has covered a broad range of topics over his long career. In 1955 he received his PhD from Columbia University in New York. Besides shorter periods in public service and in international organisations he has held academic appointments in - among others - Yale University, the University, a notable historian of economic thought, proclaimed in his "Great Economists before Keynes: 1986" that Swedish Historically Norse paganism, Christianity and more recently Secularism. Also see Religion in Sweden economist Knut Wicksell Johan Gustaf Knut Wicksell was a Swedish economist who contributed to the Keynesian , as well as the Stockholm school (economics) and Austrian School of Economics way of thinking “more or less founded modern macroeconomics”.

Macroeconomic schools of thought

The traditional distinction is between three different approaches to economics: Keynesian economics, focusing on demand; neoclassical economics Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often as mediated through a hypothesized maximization of income-constrained utility by individuals and of cost-constrained profits of firms employing available based on rational expectations Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables, is not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in that the agents inside the model assume the model' and efficient markets, and innovation economics Innovation economics is an economic doctrine that reformulates the traditional model of economic growth so that knowledge, technology, entrepreneurship, and innovation are positioned at the center of the model rather than seen as independent forces that are largely unaffected by policy. Innovation economics is based on two fundamental tenets: that focused on long-run growth through innovation. Keynesian thinkers challenge the ability of markets to be completely efficient generally arguing that prices and wages do not adjust well to economic shocks. None of the views are typically endorsed to the complete exclusion of the others, but most schools do emphasize one or the other approach as a theoretical foundation.

Keynesian tradition

Keynesian economics Keynesian economics is a macroeconomic theory based on the ideas of 20th century British economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore, advocates active policy responses by the public sector, including monetary policy actions by the central was an academic theory heavily influenced by the economist John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, CB was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments. He identified the causes of business cycles, and advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic. This period focused on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending (the government spends more or less depending on the situation) and monetary policy Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest. Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy. These goals usually include stable prices and low unemployment. Monetary theory. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies Incomes policies in economics are wage and price controls, most commonly instituted as a response to inflation, and usually below market level.

Neo-Keynesians Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists (notably John Hicks, Franco Modigliani, and Paul Samuelson), attempted to interpret and formalize Keynes' writings, and to synthesize it with the neo-classical models of economics combined Keynes thought with some neoclassical elements in the neoclassical synthesis Neoclassical synthesis was a postwar academic movement in economics that attempted to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics. Mainstream economics is largely dominated by the synthesis, being largely Keynesian on macroeconomics and neoclassical on microeconomics. Neo-Keynesianism waned and was replaced by a new generation of models that made up New Keynesian economics New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics, which developed partly in response to new classical economics. New Keynesianism strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.

Post-Keynesian economics Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson. Keynes' biographer Lord Skidelsky writes that the post-Keynesian school has remained represents a dissent from mainstream Keynesian economics, emphasizing the importance of demand in the long run as well as the short, and the role of uncertainty Uncertainty is a term used in subtly different ways in a number of fields, including philosophy, physics, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science. It applies to predictions of future events, to physical measurements already made, or to the unknown, liquidity preference Liquidity preference in macroeconomic theory refers to the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money to explain determination of the interest rate by the supply and demand for money. The demand for money as an asset was and the historical process in macroeconomics.

Neoclassical tradition

For decades Keynesians and classical economists split in to autonomous areas, the former studying macroeconomics and the latter studying microeconomics. In the 1970s new classical macroeconomics New classical macroeconomics emerged as a school in macroeconomics during the 1970s. As opposed to Keynesian macroeconomics, it builds its analysis on an entirely neoclassical framework. Specifically, new classical macroeconomics emphasises the importance of rigorous foundations, in which the macroeconomic model is built in analogy to the actions challenged Keynesians to ground their macroeconomic theory in microeconomics In economics, the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a macroeconomic theory. The main policy difference in this second stage of macroeconomics is an increased focus on monetary policy, such as interest rates and money supply. This school emerged during the 1970s with the Lucas critique The Lucas critique, named for Robert Lucas′ work on macroeconomic policymaking, supports that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data. New classical macroeconomics based on rational expectations, which means that choices are made optimally considering time and uncertainty, and all markets are clearing. New classical macroeconomics is generally based on real business cycle models.

Monetarism, led by Milton Friedman, holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time.

Macroeconomic policies

To try to avoid major economic shocks, such as The Great Depression, governments make adjustments through policy changes they hope will stabilize the economy. Governments believe the success of these adjustments is necessary to maintain stability and continue growth. However, despite government's divine intentions, government policies only hamper and stagnate stability and growth. This economic retardation is achieved through two types of governmental strategies:

• Fiscal policy
• Monetary policy

See also

• Microeconomics
• Monetary policy
• Keynesian economics
• Economic development
• Fiscal Policy
• Dynamic stochastic general equilibrium
• Model (macroeconomics)
• AP Macroeconomics
• Innovation Economics

Notes

1. ^ Blaug, Mark (1985), Economic theory in retrospect, Cambridge, UK: Cambridge University Press, ISBN 0-521-31644-8
2. ^ Sullivan, Arthur; Steven M. Sheffrin (2003), Economics: Principles in action, Upper Saddle River, New Jersey 07458: Pearson Prentice Hall, pp. 57, ISBN 0-13-063085-3, http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4
3. ^ Frisch, Ragnar (1933), Propagation Problems and Impulse Problems in Dynamic Economics, London: Allen & Unwin

References

• Blanchard, Olivier (2000), Macroeconomics, Prentice Hall, ISBN 013013306X .
• Blaug, Mark (1986), Great Economists before Keynes , Brighton: Wheatsheaf.
• Friedman, Milton (1953), Essays in Positive Economics, London: University of Chicago Press, ISBN 0-226-26403-3 .
• Heijdra, B. J.; Ploeg, F. van der (2002), Foundations of Modern Macroeconomics, Oxford University Press, ISBN 0-19-877617-9 .
• Mishkin, Frederic S. (2004), The Economics of Money, Banking, and Financial Markets, Boston: Addison-Wesley, p. 517
• Snowdon, Brian, and Howard R. Vane, ed. (2002). An Encyclopedia of Macroeconomics, Description & scroll to Contents-preview links.
• Snowdon, Brian; , Howard R. Vane (2005), Modern Macroeconomics: Its Origins, Development And Current State, Edward Elgar Publishing, ISBN 1-84376-394-X .
• Gärtner, Manfred (2006), Macroeconomics, Pearson Education Limited, ISBN 978-0-273-70460-7 .
• Warsh, David (2006), Knowledge and the Wealth of Nations, Norton, ISBN 978-0393059960 .

Categories: Macroeconomics

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