What is macroeconomics? Definition and meaning
Macroeconomics is a branch of economics that focuses on general or large-scale economic factors – it looks at the ‘big picture’. The word macro means overall or large-scale.
Macroeconomics gathers and analyzes economy-wide data and phenomena such as inflation, unemployment, GDP (gross domestic product) growth, and national income.
It studies how the aggregate (whole) economy behaves.
In its most basic form, macroeconomics deals with the performance, behavior, structure and decision-making of the aggregate economy, rather than focusing on individual markets.
Macroeconomic contrasts with microeconomics, which is the study of the behavior of individual households, consumers, companies, workers and markets.
Macroeconomics vs Microeconomics
Factors that are studied in both macroeconomics and microeconomics usually have an impact on one another. For example, the level of joblessness in the overall economy affects the availability of workers that a company can hire.
If you combine all microeconomic activity in the economy, you get the macroeconomic phenomena.
Output and income
National output, or GDP, is everything a country produces in a specified period – either a month, a quarter, half a year, or 12 months.
Everything that is made and sold generates an equal amount of income. Output and income, therefore, are generally considered equivalent – the two terms are commonly used interchangeably.
Output may be measured as total income, or it can be observed from the production side and measured as the total value of finished products and services or the total sum of all value added (sum of the unit profit, the unit depreciation cost, and the unit labor cost) in the economy.
Macroeconomic output is typically measured by GDP or one of the other economy-wide accounts. Macroeconomists who are interested in long-term increases in output study GDP growth.
Over time, economic output increases because of the accumulation of machinery and other capital, advances in technology, better education, and human capital.
The unemployment rate is the percentage of people able to and wanting to work, but have no jobs. It does not include individuals who are retired, pursuing education, or those put off from seeking work due to poor prospects.
Inflation and deflation
Inflation is the rate at which the prices of products and services increase. It can be measured in a number of different ways. The most common and most frequently quoted ones are the RPI (retail prices index) and the CPI (consumer prices index).
The CPI and RPI each look at the prices of hundreds of products and services that consumers commonly spend money on, including beer, cinema tickets, bread, and milk – and track how these prices have fluctuated over time.
If the CPI is 3%, it means that on average, the price of goods and services is three percent higher than it was one year ago, i.e. we would need to spend three percent more to purchase the same things we bought one year ago.
Inflation is one of the most important issues in macroeconomics. It affects the interest rate people get on their savings and the rate borrowers pay on their mortgages.
It also has an effect on the level of pensions and state benefits, as well as the price of bus and train tickets.