When you think of the word “macroeconomy,” you likely think of a magnified economy. Perhaps you think of the economy of a nation or even the entire world. This is the right idea. The macroeconomy is a certain economic institution or system that operates on a large scale. Macroeconomics is the study of this economy as a whole — this “macroeconomy”. Rather than reducing economic units to the household or the individual, which is microeconomics, the macroeconomy focuses on aggregates — consumer spending as a whole, or investment demand as a function of interest rates for firms in a nation. The idea is focusing on the whole and the large parts, rather than the small part, which causes small, insignificant change or deviation.
In studying macroeconomics, we want to think about the institutions, the economic indicators, and the groups that contribute to the whole economic system. Examples of such institutions would be the Federal Reserve System, which sets benchmark interest rates and can greatly influence dozens of important aspects and subsystems of the national economy. The stock market is another example, facilitating willing investors with companies — providing a necessary influx of capital from investors to new projects or infrastructure. An example of an economic indicator in the macroeconomy would be the GDP growth rate. How fast does an economy grow each year? What fiscal or monetary actions must be taken to adjust this rate?
In opposition, the study of microeconomics would focus on small parts of the economic system. The individual, and how they choose to spend their money based on utility or profit maximization principles, or the firm, which chooses how to price their products based on the structure of the industry in which they operate. These are important concepts as well, but not important in the grand scheme of the macroeconomy. One individual firm’s choices are insignificant in the macroeconomy — if a firm chooses to overprice its products in a perfectly competitive industry, that firm will be pushed out of the entire industry. This does not deviate the path of the macroeconomy, which solely depends on large collections of such firms or individuals in the economy.
Suppose a large group of individuals chooses to spend more money – this will cause a significant change in the macroeconomy, which is why macroeconomists tend to only focus on aggregates.
In studying macroeconomics, we can better understand the economic trends that influence an economy. We can begin to understand why aggregate groups make decisions answer questions like:
- If the interest rate is high, why does investment decrease?
- How is the nominal interest rate connected to the real interest rate?
- How does an increase in unemployment compensation affect the unemployment rate?
These are all complicated systems that function as part of the macroeconomy. Many economic theories attempt to explain the trends in macroeconomics, of which the most famous theory is undoubtedly Keynesian economics.
Macroeconomics becomes even more complicated when we think of the macroeconomy on a global level. How do the economies of other nations influence the global economy? How do global recessions start? These are just a few questions that can be uncovered and answered through the study of macroeconomics.
Studying macroeconomics is incredibly important because it can and will affect you. You may watch CNBC or Bloomberg Markets, and hear discussion of the Fed’s raising of interest rates. How will this affect that new mortgage loan you wanted to take out? You may hear that the housing bubble is about to burst. These are all macroeconomics concepts, but they affect you. Understanding what is happening to the macroeconomy keeps you informed and financially ready for anything.