Macroeconomics

Macroeconomics is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices. Macroeconomics can be used to analyse how best to influence policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments.

Until the 1930s most economic analysis concentrated on individual firms and industries. With the Great Depression of the 1930s, however, and the development of the concept of national income and product statistics, the field of macroeconomics began to expand. Particularly influential were the ideas of John Maynard Keynes, who used the concept of aggregate demand to explain fluctuations in output and unemployment. Keynesian economics is based on his ideas.

One of the challenges of economics has been a struggle to reconcile macroeconomic and microeconomic models. Starting in the 1950s, macroeconomists developed micro-based models of macroeconomic behavior (such as the consumption function). Theorists such as Robert Lucas Jr suggested (in the 1970s) that at least some traditional Keynesian macroeconomic models were questionable as they were not derived from assumptions about individual behavior. However, New Keynesian macroeconomics has generally presented microeconomic models to shore up their macroeconomic theorizing, while the Lucas critique has fallen from favor.

Today the main schools of macroeconomic thought are as follows:

• Keynesian economics, which focuses on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. 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.

• Monetarism, which 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, keeping the rate of growth of the money supply constant over time.

• New classical economics, which emphasises the idea of rational expectations. Their original theoretical impetus was the charge that Keynesian economics lacks microeconomic foundations -- i.e. its assertions are not founded in basic economic theory. This school emerged during the 1970s. This school assumed that at any one time, there was only one "market clearing" equilibrium and that the economy automatically gravitated to that equilibrium. Fluctuations occurred due to changes in potential output, i.e., changes in aggregate supply.

• New Keynesian economics, which developed partly in response to new classical economics. It strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.

• Supply-side economics, which deliniates quite clearly on the role of monetary policy and fiscal policy. The focus for monetary policy should be purely on the price of money as determined by the supply of money and the demand for money. It advocates a monetary policy that directly targets the value of money. Typically the value of money is measured by reference to gold or some other reference. The focus of fiscal policy is to raise revenue for worthy government investments with a clear recognition of the impact that taxation has on domestic trade.

See also

Macroeconomic concepts

IS/LM model -- Monetary policy -- Central bank -- Money -- Currency -- Purchasing power parity -- Gold standard -- Inflation -- Unemployment -- Adaptive expectations -- Rational Expectations -- Economic rationalism -- Measures of national income -- Balance of trade -- Gresham's Law -- Reaganomics -- Recession -- Stockholm school

Macroeconomic schools

Keynesian economics -- Monetarism -- New classical economics -- New Keynesian economics -- Austrian economics -- supply side economics -- Welfare economics

Macroeconomists

John Maynard Keynes -- Milton Friedman -- Robert Lucas Jr -- Jose Victor Rios Rull -- Robert Mundell

Related topics

Development economics -- Economics -- Political economy -- List of economics topics -- List of economic geography topics -- List of international trade topics -- Important publications in macroeconomics