Macro Economics

Macroeconomics studies the broader aspects of economics and studies the behavior of an economy as a whole; It examines the behavior of economic aggregates such as aggregate income, consumption, investment and the general level of prices.

Development of Macroeconomics:

Any discussion on macroeconomics begins with J.M Keynes, the famous economist.

Before Keynes, business cycles were considered inevitable and there was no concentrated approach to solving these problems. These economists are known as classical economists focused only on the microeconomics aspects of the economy. The great depression of the 1929 left many of these economists helpless. In this context, Keynes devised a new approach to look at the economy.

In his book “The General Theory of Employment, Interest and Money,” Keynes argued that it is possible that high unemployment and under-utilization of capabilities can take place and continue in the market economy. He also argued that the government can play a more important role during economic depressions through the effective use of monetary and fiscal policy.

After the Second World War, the focus of the economy was only aimed at counteracting unemployment and inflation, and some economists proposed a fixed rate of money growth to tackle these problems, such as inflation and unemployment. Therefore, these economists were called monetarists because they gave importance to money.

Basic concepts in macroeconomics:

  • In macroeconomic studies, various variables are used. Some are stock variables and some are flow variables. Variables such as the supply of money, the CPI, currency reserves, which can be measured at any given time are called stock variables. While variables such as GDP, inflation, imports, consumption and investment, which can only be measured over a period of time, are flow variables.
  • Equilibrium reflects the equilibrium between the opposing forces, while the disequilibrium reflects the lack of such equilibrium.
  • The model that does not explicitly consider the behavior of variables from one time period to another is called a “static” model.
  • The “Dynamic” model considers the movements of variables in different periods of time explicitly.

The Components of the Macro Economy:


Another way to see how households, businesses, government and the rest of the world are related is to consider the market in which they interact.

  • The Goods and Services Market:

Supply of companies to the market of goods and services. Households, government and firms demand from this market.

  • Labor market:

In this market, households provide labor and firms and the government demands labor.

Households provide funds to this market with the expectation of obtaining income in the form of stock dividends and interest on bonds.

Firms, the government and the rest of the world also participate in loans and loans coordinated by financial institutions.

Policy instruments:

  • Fiscal policy

Fiscal policy refers to the use of taxes and government expenditures. The government has to meet various expenses such as salaries, defense expenses, infrastructure development, etc. All these expenses have a positive effect on the economy in general. The impact of government spending is also felt in total spending on the economy, which influences the size of GDP.

  • Monetary policy

Monetary policy is the second most widely used macroeconomic policy instrument. The monetary policy helps the government to manage the banking, credit and money system of the country.

The central bank regulates the monetary system and other entities such as banks and insurance companies are also part of the monetary system. The central bank brings changes in interest rates, reserve requirements, etc. These changes have a significant impact on the overall functioning of the economy.