Macroeconomics: A Complete Guide (With History and Scope)

By Indeed Editorial Team

Published 3 April 2022

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The term macroeconomics refers to studying the performance, structure, behaviour and operations of an economy. It mainly focuses on how economies perform via aspects like inflation, fiscal policy, monetary policy, currency exchange rates and other considerable factors that impact the overall economy. Studying its role in extensive detail can help you understand its contribution to the country's financial development. In this article, we discuss its meaning, history, scope and research areas in India in comprehensive detail, and also talk about macro vs. microeconomics.

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What is macroeconomics?

Macroeconomics is the study of a nation's economics that encompasses a wide range of topics, including analysing the scarcity and use of resources, poverty and social equity, along with the decision-making of such matters. The subject primarily focuses on managing finances and budget efficiently and has branches that cover deeper topics. It studies how an economy functions on a large scale, including the operations of the market and the overall performance and structure of an economy.

It involves studying economy-wide phenomena like inflation, price levels, rate of economic growth, gross domestic product (GDP), national income and unemployment. The subject also covers events that have had a significant impact on the economy on a large scale. It is also known as the theory of income and employment, as it primarily addresses financial topics concerning economic growth and development.

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History of the macroeconomic phenomenon

The term originates from the Greek prefix 'makro', meaning large. It has a modern origin, traced to the 1940s. Some of its core concepts like price, growth and trade have been the focus areas of study for several years. The scope of research in these topics became more prominent during the 20th and 21st centuries. There are different macroeconomic schools of thought, depending on the varied perspectives on the operation of markets and participants. Here are a few important theories:

Keynesian theory

John Maynard Keynes gave the modern definition of a macroeconomy in 1936 when he explained the fallout from the great depression in his book 'The General Theory of Employment, Interest and Money.' In this theory, he explains the reason behind unsold goods and unemployed people. The theory focuses on how even a small decrease in consumption or investment can magnify and cause a decline throughout the economy. Following the framework of Keynes' theory on microeconomics, the next generation of economists developed more theories based on consumption, money demand and investments.

Monetarism

Monetarism is a branch of Keynesian economics based on the works of Milton Friedman. It argues that by targeting the growth rate of the money supply, governments can foster economic stability. This theory states that the availability of money in a system creates a rise in the aggregate demand for goods and services. It increases instances of job creation and reduces the unemployment rate, stimulating economic growth. Monetarists' views are that the total amount of money in an economy determines its overall growth. The theory uses monetary policies as a tool to keep the economy growing at a steady rate.

New classical

The new classical approach by Robert Lucas challenged Keynesian theories by introducing rational expectations to the field. Earlier, economists used adaptive expectations to calculate future predictions. But under rational expectation, they took a more sophisticated approach that considered the current monetary policies and economic conditions to make more informed and accurate forecasts. This transformation led to the creation of the real business cycle (RBC) model of the macroeconomy. The model focused more on recession and unemployment as a result of changes in technology, as opposed to the changes in the market demand.

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Areas of research

Even though macroeconomy is a broad field, there are two areas of research within it, including:

Economic growth

This area of research focuses on factors that determine long-term economic growth where growth is a product of physical capital, human capital, labour force and technology. Rather than view economic growth as a short-term performance, it highlights growth as a transformative process. According to this, regardless of the type of economy, growth is always uneven and unbalanced across the world.

An economy can generate economic growth through any of the four methods. These include technological development or an increase in the labour force, human capital or the number of physical capital goods in the economy. Increasing the proportion of the working-age population and adding tools that combine labour, capital and raw materials are the factors that can lead to increased economic output.

Business cycle

A business cycle includes the fluctuating levels and rate of changes of several economic variables like employment and national output over the long term. It consists of all the different phases of an economy like expansion, peak growth, reversal, depression and recession. The changes between the expansion and contraction levels of economic activity, represented by the GDP, mark a business cycle.

The most notable phases within a business cycle are the growth peak and recession stages. A growth peak is when an economy reaches its peak and shows no sign of growing further. A recession is the lowest point in an economy when all its important factors, including income, sales, employment and production, undergo a drastic fall. The business cycle also undergoes recovery after a recession period. The economy sees an increase in income, jobs, sales and output, and this recovery has to become self-feeding so that it can cause sustained economic expansion.

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Scope of the field

Some common topics that find mention under this field of economics:

Unemployment

The rate of unemployment in an economy has a drastic impact on its overall growth and development. An economy where a majority of people lack employment is unlikely to see a rise in individual spending. An increased unemployment rate also increases the rate at which people look for jobs. Unemployment can be categorised based on its diverse causes. Some of these include classical unemployment, frictional unemployment and structural unemployment. Economists study the causes of unemployment and its effects to help curb the rate of unemployment from paralysing the economy.

GDP

Gross domestic product or GDP is the total market value of the finished goods and services produced in a country within a specific period. It is a metric to assess a nation's economic condition, and economists either calculate annually, biannually or quarterly. The GDP is an essential tool that guides policy-makers and investors in making strategic business decisions for a thriving economy. Economists study GDP to gain an understanding of a country's profitability. They also focus on studying how GDP affects the overall currency value.

Inflation

Inflation occurs when there is a rise in the general price level across the economy. Economists use a price index to monitor changes in the price levels that lead to inflation. Inflation often leads to increased uncertainty about the currency value. It also causes a significant surge in pricing that can be harmful to the economy. It is a fluctuating phenomenon and often causes the value of the currency to rise and fall while causing the prices of goods and services to increase. Economists study inflation to determine its causes and the long-lasting effects on the economy.

Budget

In most economies, the government plays a vital role in shaping the financial structure of the country. It issues currency, holds a significant quantity of assets and determines the sector-wise spending through the budget. Macroeconomists primarily study budgets to assess government spending and understand how budgets for specific areas can affect the supply chains of others.

Output and income

A nation's income can be determined by the value of goods and services that a country supplies. Its output is the total of everything it produces within a specific time. In economics, income and output are equivalent and often interchangeable, terms. The macroeconomic output of a country is generally measured by its GDP, and economists study the income and output to understand the country's economic growth patterns.

Macroeconomics vs. microeconomics

Both the terms are two different branches of the same field. The former encompasses the study of economic factors from a broader perspective. It magnifies the economy and examines all things on a much larger scale, like studying national and global economies.

Microeconomics, on the other hand, focuses on a smaller perspective. It emphasises analysing individual consumer patterns. It also studies the impact of changes on a personal level. In simple terms, the former allows you to study a wide and complex web of supply and demand across world economies, whereas the latter includes studying individual businesses or establishments.

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