Macroeconomics

Macroeconomics is the study of the entire economy in terms ofthe total amount of goods and services produced, total income earned, the level of employment of productive resources, and thegeneral behavior of prices. Macroeconomics can be used to analyse how best to influence policy goals such as economic growth , price stability , full employment and theattainment of a sustainable balance of payments.

Until the 1930s most economic analysis concentrated on individual firms andindustries. With the Great Depression of the 1930s, however, andthe development of the concept of national income and product statistics, the field of macroeconomics began to expand.Particularly influential were the ideas of John MaynardKeynes , who used the concept of aggregate demand to explainfluctuations in output and unemployment. Keynesian economics is based on his ideas.

One of the challenges of economics has been a struggle to reconcile macroeconomic and microeconomic models. Starting in the 1950s, macroeconomists developed micro-based models of macroeconomicbehavior (such as the consumption function ). Dutch economist Jan Tinbergen developed the first comprehensive national macroeconomic model , which he first built for the Netherlands and later applied to the United States and the United Kingdom after World War II . The first global macroecomomic model, Wharton EconometricForecasting Associates LINK project, was initiated by Lawrence Klein and was mentioned in his citation for the Bank of Sweden Prize in Economic Sciences in Memory ofAlfred Nobel in 1980 .

Theorists such as Robert Lucas Jr suggested (in the 1970s) that atleast some traditional Keynesian macroeconomic models were questionable as theywere not derived from assumptions about individual behavior. However, New Keynesian macroeconomics has generally presented microeconomic models to shore up theirmacroeconomic theorizing, while the Lucas critique has fallen from favor.

Today the main schools of macroeconomic thought are as follows:

• Keynesian economics , which focuses on aggregate demand toexplain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy . Early Keynesian macroeconomics was "activist,"calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies .

• Monetarism , led by Milton Friedman , which holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to " crowding out "of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as inKeynesian economics, but by means of monetarypolicy rules, such as keeping the rate of growth of the money supply constant over time.

• Post-Keynesian economics represents a dissentfrom mainstream Keynesian economics, emphasizing the role of uncertainty andthe historical process in macroeconomics.

• New classical economics , which emphasises theidea of rational expectations . Their original theoreticalimpetus was the charge that Keynesian economics lacks microeconomic foundations -- i.e. its assertions are not founded in basiceconomic theory. This school emerged during the 1970s. This school assumed that at any one time, there was only one " market clearing " equilibrium and that the economy automatically gravitated tothat equilibrium. Fluctuations occurred due to changes in potentialoutput , i.e., changes in aggregate supply .

• New Keynesian economics , which developed partlyin response to new classical economics. It strives to provide microeconomic foundations to Keynesian economics by showing howimperfect markets can justify demand management.

• Supply-side economics , which deliniates quite clearlyon the role of monetary policy and fiscal policy . The focus for monetary policy should be purely on the price of money as determined bythe supply of money and the demand for money. It advocates a monetary policy that directly targets the value of money and doesnot target interest rates at all. Typically the value of money is measured by reference to gold or some other reference. Thefocus of fiscal policy is to raise revenue for worthy government investments with a clear recognition of the impact that taxationhas on domestic trade.

• Austrian macroeconomics presents another laissez-faire school of macroeconomics. It focuses on the business cycle that arises from government or central-bank interference thatleads to deviations from the natural rate of interest.

See also

Macroeconomic concepts:

IS/LM model -- Monetary policy -- Central bank -- Money -- Currency -- Purchasing power parity -- Gold standard -- Inflation -- Unemployment -- Adaptive expectations -- RationalExpectations -- Economic rationalism -- Measures of national income -- Balance of trade -- Gresham's Law -- Reaganomics -- Recession -- Stockholm school

Macroeconomic schools:

Keynesian economics -- Monetarism -- New classicaleconomics -- New Keynesian economics -- Austrian economics -- supply side economics -- Welfareeconomics

Macroeconomists:

John Maynard Keynes -- Milton Friedman -- Robert Lucas Jr -- Jose Victor Rios Rull -- Robert Mundell

Related topics:

Development economics -- Economics -- Political economy -- List of economics topics -- List of economic geography topics -- List of international tradetopics -- Important publications in macroeconomics