Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, as opposed to individual markets. This includes national, regional, and global economies. Macroeconomics involves the study of aggregated indicators such as GDP, unemployment rates, and price indices for the purpose of understanding how the whole economy functions, as well as the relationships between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.
Microeconomics, on the other hand, is the branch of economics that is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets. One of the goals of microeconomics is to analyze market mechanisms that establish relative prices among goods and services and the allocation of limited resources among many alternative uses. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty, and economic applications of game theory.
Macroeconomics is typically used to determine the health of a nation's economy by comparing the GDP of a country and its total output or expenses. GDP is the total value of all final goods and services legally produced in an economy in a given time period. So, a region is considered in better health when the ratio of GDP to expenses is higher, meaning in lay terms that a nation is bringing in more than it puts out. Another measure used is GDP per capita, which is a measurement of the value of all goods and services divided by the number of participants in an economy. This is used to determine the standard of living and extent of economic development in a country, where a higher standard of living and greater economic development come as more people have greater overall production value. For example, the U.S. and China have a similar overall GDP, but the U.S. has a far better GDP per capita due to its far fewer economic participants, reflecting the higher standard of living in the U.S. Macroeconomics is also used to develop strategies for economic improvement at the nationwide and global levels.
Microeconomics is used to determine the best sort of choices an entity can make for maximum profit, regardless of the type of market or arena it is involved in. Microeconomics can also be considered a tool for economic health if used to measure the income versus output ratio of companies and households. Simply put, gaining more than is lost equals a better individual economy, much like on the macro-level. Microeconomics is applied through various specialized subdivisions of study, including industrial organization, labor economics, financial economics, public economics, political economics, health economics, urban economics, law and economics, and economic history.
Basic Macroeconomics Concepts
Macroeconomics encompasses a variety of concepts and variables related to the economy at large, but there are three central topics for macroeconomic research. Macroeconomic theories usually relate the phenomena of output, unemployment, and inflation.
Output and Income
National output is the total value of everything a country produces in a given time period. Everything that is produced and sold generates income. Therefore, output and income are usually considered equivalent and the two terms are often used interchangeably. Output can be measured as total income, or, it can be viewed from the production side and measured as the total value of final goods and services or the sum of all value added in the economy. Macroeconomic output is usually measured by Gross Domestic Product (GDP) or one of the other national accounts. Economists interested in long-run increases in output study economic growth. Advances in technology, accumulation of machinery and other capital, and better education and human capital all lead to increased economic output over time. However, output does not always increase consistently. Business cycles can cause short-term drops in output called recessions. Economists look for macroeconomic policies that prevent economies from slipping into recessions and lead to faster, long-term growth.
The unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labor force. The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force. Unemployment can be generally broken down into several types relating to different causes. Classical unemployment occurs when wages are too high for employers to be willing to hire more workers. Frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment. Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates.
Inflation and Deflation
Economists measure changes in prices with price indexes. Inflation (general price increase across the entire economy) occurs when an economy becomes overheated and grows too quickly. Inflation can lead to increased uncertainty and other negative consequences. Similarly, a declining economy can lead to deflation, or a rapid decrease in prices. Deflation can lower economic output. Central bankers try to stabilize prices to protect economies from the negative consequences of price changes. Raising interest rates or reducing the supply of money in an economy will reduce inflation.
Basic Microeconomic Concepts
Microeconomics also encompasses a variety of concepts and variables related to the individual, household or business. We will focus on the three central topics for microeconomic research: preference relations, supply and demand, and opportunity cost.
Preference relations are defined simply as a set of different choices that an entity can make. Preference refers to the set of assumptions related to ordering some alternatives, based on the degree of satisfaction, enjoyment, or utility they provide; a process which results in an optimal choice. Completeness is taken into consideration, where "completeness" is a situation in which every party is able to exchange every good, directly or indirectly, with every other party without transaction costs. In order to analyze the problem further, the assumption of transitivity, a term for how preferences are transferred from one entity to another is considered. These two assumptions of completeness and transitivity that are imposed upon the preference relations together compose rationality, the standard by which a choice is measured.
Supply and Demand
In microeconomics, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity.
Opportunity cost of an activity (or goods) is equal to the best next alternative uses. Opportunity cost is one way to measure the cost of something. Rather than merely identifying and adding the costs of a project, one may also identify the next best alternative way to spend the same amount of money. The forgone profit of this next best alternative is the opportunity cost of the original choice.
Macroeconomics research and analyze data on national and global economies. They gather information from longitudinal studies, surveys and historical statistics, and use it to make predictions in the economy or even offer solutions to problems. Specific aspects of an economy, like the manufacture and distribution of raw materials, poverty rates, inflation, or the success of trade are also a prime focus for macroeconomists, who are frequently consulted by politicians and civic authorities when making public policy decisions.
Micro-economists focus on specific industries or businesses. An expert microeconomist conducts thorough research on the financial matters of a business, and offers advice on how to scale or make improvements. They often constructs supply and demand ratio graphs to determine the budget and resources to be allocated to production. A micro-economist can help business owners and CFOs set pay scales based on industrial trends and the availability of funds.
Macroeconomics and Microeconomics are, in the college world, generally relegated to specific higher level courses that fall under the parent subject of Economics. Most of the time, an actual degree program will simply be in economics, though a student majoring in this subject may then choose to specialize in the micro or macro areas as electives. All economics majors regardless of the area will be required to take multiple math courses, particularly calculus, and, typically, a few statistics courses as prerequisites to higher level economics courses. Business students as well as a few other potential majors will often be required to take a basic economics course or two as a part of their core coursework for foundation, and some students will simply choose to take Economics 101 for what it offers to their education. A student can also minor in economics, a practice which is often done to provide a good background for students seeking careers in law, business, government, journalism, and teaching.
Opinions On Economic Change
Macroeconomists tend to be all about economic stimulus and what accompanies it, though there is a lack of unity even among macroeconomists on this particular issue. From the macroeconomist point of view, what it takes to fix the economy of a given country today is to pour money into it. This action is done in order to provide economic growth, and is then analyzed in terms of how much growth is produced, how much unemployment is caused or prevented, and when the government will get its money back, if at all. Most macroeconomists are Keynesians, or economists who support government intervention and steering of the economy, and so measure success primarily by the above factors when considering what to do with government money.
Microeconomists, on the other hand, are often not as positive about stimulus action by the government. They believe that macroeconomists tend to ignore the most basic microeconomic question: Where are the incentives? Who has an incentive to improve the economy? Microeconomists believe it is a mistake to look at the country as an entity, because is not the actual country which decides where stimulus money will be spent. Rather, it is the politicians who are governing the country. So, instead of looking at what would be best for the country, we need to look at what politicians would have an incentive to do. Instead of assuming that politicians would choose based on what it best for a country's economic health, microeconomists believe people need to recognize at the microeconomic level that a politician is choosing based entirely on his own incentives.
The issue is such that at the very basic framework level, microeconomists are looking at entirely different factors than macroeconomists when they analyze the health of our attempts at economic recovery.