Macro Economics: Definition, History, Variables, and Importance

Macroeconomics is the branch of economics that examines the economy as a whole. Inflation, market prices, economic expansion, income growth, gross domestic product (GDP), and unemployment numbers are examined in macroeconomics. Microeconomics examines items on an individual scale, such as an individual, a family, or a single enterprise.

It is related to the net effect on the economy, such as inflation, GDP, unemployment, etc. Macroeconomics is used by organizations to analyze various economic policies and implement them.

Macroeconomics is derived from the Greek word “macro” (large) and economics, which means macroeconomics gives us the overall perspective on the economy. There are two different fields: macroeconomics and microeconomics.

The release of John Maynard Keynes’ General Theory of Employment, Interest, and Money marked the beginning of macroeconomics, at least in its contemporary form. John Maynard Keynes explained the outcome of the Great Depression when goods were unsold, and workers became unemployed. Only after Keynes’s theory did economists start differentiating between micro and macroeconomics. Afterwards, Keynes’s theory was divided into various schools of thought.

The various laws, tools, and technologies that enable economic growth are linked by macroeconomics. Social fairness and poverty reduction are impossible without effective macro-management. Hence, macroeconomics is highly important for the overall development of an economy.

What is Macroeconomics?

Macroeconomics is the branch of economics that deals with bigger economic factors such as poverty, Inflation, market prices, economic expansion, income growth, GDP (gross domestic product), etc. These economic factors are called macroeconomic variables. The main aim of macroeconomics is to develop economic policies that can explain the relationship between all these variables.

When used efficiently, macroeconomics can help organizations and governments develop economic policies with promising long-term consequences. A better understanding of microeconomics can help businesses and investors make profitable decisions by understanding the relations between different microeconomic variables.

Macroeconomics is different from microeconomics, which deals with individual components of the economy, like consumers, vendors, and their behavior. Understanding the patterns of specific companies and supply chains, as well as consumer wants, is made possible by microeconomics. Before the 1930s, both micro and macroeconomics were considered the same, with no differentiation among them.

How does macroeconomics work?

Macroeconomics is best represented by two particular research areas despite being a rather vast science. The first area is what influences long-term economic growth. The second focuses on the factors that contribute to and are affected by short-term changes. Macroeconomics is highly important for a growing economy, hence an entity is required to analyze and research these kinds of large-scale variables that can affect the economy.

For example, in the United States of America, the Federal Reserve is the central bank tasked with encouraging the highest level of employment and price stability. These two elements have been recognized as being crucial for successfully influencing macroeconomic change. The Federal Reserve is the central bank tasked with encouraging the highest level of employment and economic stability. These two elements have been recognized as being crucial for successfully influencing macroeconomic change.

What is the importance of macroeconomics? 

Various issues like unemployment, overpopulation and inflation hinder the growth of a growing economy. For the purpose of resolving such kinds of issues, macroeconomics is used to develop policies and decisions that can uplift the overall economy.

When the macroeconomic variables are studied and analyzed successfully, implementation becomes easy for governments and organizations. This would also help in controlling business cycles (deflation and inflation).

The study of macroeconomics is required to get an overall idea of the economy in terms of national income. The national income data also helps us evaluate the various kinds of activities operational in an economy and how wealth is distributed among various economic groups.

Macroeconomics helps us evaluate an economy’s capabilities and limitations and find ways to create jobs, avoid overpopulation, deal with inflation, etc.

What are the major variables of Macro Economics?

Macroeconomic variables are general indicators that evaluate and analyze the strengths and weaknesses of an economy. These kinds of indicators are beneficial for analyzing the financial health of an economy. Hence these variables are evaluated by financial experts, economists, and other kinds of professionals. These indicators are not just beneficial for the government, these are also used by businesses and international markets to make profitable decisions.

1. Inflation

The term “inflation” describes the general increase in an economy’s price level or the total value of the currency. The value of the currency and the number of goods and services it can be used to purchase fluctuate along with inflation. Economists may understand inflation’s causes and effects on consumers, businesses, and the value of money by researching it.

2. Unemployment

The term “unemployment” refers to individuals who are employable and willing to work but are unable to find work. An economy can be significantly impacted by unemployment. People are inclined not to spend money in the economy if they are not working. The economy could suffer as a result of this. Large-scale reductions in unemployment can be achieved through research into the factors that contribute to it and the ways in which these factors can be reduced.

2. Balance of Payment

The Balance of Payment (BOP) is a report that lists every financial transaction that took place between citizens of one country and people from other countries over a specific time period.

In a perfect world, when all the components are correctly incorporated into the BOP, it should be 0. This indicates that the inflows and outflows of money should be equal. In most situations, nevertheless, this does not exactly take place.

3. Economic Growth

An economy is said to be experiencing economic growth when its total output of goods and services rises. To respond by promoting economic policies that will encourage advancement, progress, and growing living standards, macroeconomists work to understand the elements that either promote or slow economic growth.

How does Macroeconomics start?

Macroeconomic concepts like unemployment, prices, and inflation have been studied for a long time (since the 1700s). Before the Keynes theory, there was no differentiation between microeconomics and macroeconomics.

Later in the 20th century, this theory would become known as Keynesian economics, which is also known as Keynesianism or Keynesianism theory.

Keynesian models were formalized by economists like Paul Samuelson, Franco Modigliani, James Tobin, and Robert Solow, who also offered formal theories of money demand, consumption, and investment. This model is a cornerstone of modern macroeconomics and is now used by numerous central banks.

Other major contributors to the macroeconomy include Paul Samuelson, Franco Modigliani, James Tobin, and Robert Solow. Samuelson is known for developing static and dynamic economic theory and contributing to the advancement of economic analysis.

Modigliani was given the Nobel Prize for his pioneering work in various practical applications of economic theory. Tobin was given the Nobel Prize for his research and analysis of the relationship between financial markets and output, prices, spending decisions and budgeting, and employment.

What is the difference between Macroeconomics and Microeconomics? 

• Microeconomics is different from macroeconomics as it focuses on smaller factors of the economy.
• The biggest difference between micro and macroeconomics is that similar variables can sometimes behave differently. For example, as per the Keynesian theory of economics (microeconomics), individuals should save money to build wealth. But when everyone starts saving money, ultimately, the economy will slow down as the cash flow in the market will be reduced. And then the worker’s wages would decline.
• Macroeconomics deals with the variables (unemployment, inflation, and poverty) which tell us about the overall development of the economy. On the other hand, microeconomics deals with concepts of how individuals make certain choices. These individuals can be evaluated in subgroups of buyers, sellers, and business owners.

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.