Question

Define macroeconomics and explain its roots (history)

Answer 1

The study of Economics basically deals with two sides i.e. Micro Economics and Macro Economics. As the term suggests, macroeconomics looks at the overall, big-picture scenario of the economy. In other words, it focuses on the way the economy performs as a whole and then analyzes how different sectors of the economy relate to one another in order to understand how the aggregate functions. Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.

Various macroeconomic models are developed that explain the relationship between the factors. Such models and the forecasts produced by them are used for different purposes:

Government entities use it to help in the construction and evaluation of economic, monetary and fiscal policy.

Businesses use to set strategy in domestic and global markets.

Investors use it to predict and plan for movements in various asset classes.

Economic theories play a significant role and if applied properly, these theories can depict the functioning of economies and consequences of particular policy or decision. On the whole, it has a role to play in the economic decisions with the target to maximize utility with the scarce resources available in the economy.

The term 'Macroeconomics' was coined by Ragnar Frisch in 1933. The core concepts of macroeconomics like unemployment,prices,growth and trade were a matter of concern for the economists from very beginning of the discipline. However, it was through 1990s and 2000s that the study became more focused and specialized.

Macroeconomics, is often considered to originate with John Maynard Keynes and the publication of his book The General Theory of Employment, Interest and Money in 1936. Keynes offered an explanation for the fallout from the Great Depression, when goods remained unsold and workers unemployed. Keynes's theory attempted to explain why markets may not clear.

Before the popularization of Keynes theories, there was generally no distinction made by economists in matter of microeconomics and macroeconomics. It was understood that the same micro economic laws of supply and demand that operate in individual goods markets interacted between individuals markets to bring the economy into a general equilibrium,as described by Leon Walras. Other Economists like Knut Wicksell, Irving Fisher, and Ludwig von Mises emphasized on the role of money as a medium of exchange to explain the link between goods markets and large-scale financial variables such as price levels and interest rates.

Throughout the 20^th century, Keynesian economics, as Keynes' theories became known, separated into several other schools of thought. The field of macroeconomics is organized into many different schools of thought, with differing views on how the markets and their participants operate.

Classical : Classical economists hold that prices, wages, and rates are flexible and markets always clear, building on Adam Smith's original theories.

Keynesian: According to Keynesian, Aggregate demand is the main factor in issues like unemployment and business cycles. Keynes believed that government has a role to play in controlling business cycles by way of Fiscal policy and Monetary Policy. They also believed in certain rigidities in the system like sticky prices that prevent the proper clearing of supply and demand.

Monetarist: The Monetarist school is largely credited to the works of Milton Friedman. Monetarist economists believe that the role of government is to control inflation by controlling the money supply. Monetarists believe that markets are typically clear and that participants have rational expectations. Monetarists reject the Keynesian notion that governments can "manage" demand and that attempts to do so are destabilizing and likely to lead to inflation.

New Keynesian: The New Keynesian school attempts to add micro economic foundations to traditional Keynesian economic theories. While New Keynesians' do accept that households and firms operate on the basis of rational expectations, they still maintain that there are a variety of market failures, including sticky prices and wages. Because of this "stickiness", the government can improve macroeconomic conditions through fiscal and monetary policy.

Neoclassical:  Neoclassical economics assumes that people have rational expectations and strive to maximize their utility. This school presumes that people act independently on the basis of all the information they can attain. The idea of marginalism and maximizing marginal utility is attributed to the neoclassical school, as well as the notion that economic agents act on the basis of rational expectations. Since neoclassical economists believe the market is always in equilibrium, macroeconomics focuses on the growth of supply factors and the influence of money supply on price levels.

New Classical: The New Classical school is built largely on the Neoclassical school. The New Classical school emphasizes the importance of microeconomics and models based on that behavior. New Classical economists assume that all agents try to maximize their utility and have rational expectations. They also believe that the market clears at all times. New Classical economists believe that unemployment is largely voluntary and that discretionary fiscal policy is destabilizing, while inflation can be controlled with monetary policy.

Austrian: The Austrian School is an older school of economics that is seeing some revival in popularity. Austrian school economists believe that human behavior is so distinct to model accurately with mathematics and that minimal government intervention is best. The Austrian school has contributed useful theories and explanations on the business cycle, implications of capital intensity, and the importance of time and opportunity costs in determining consumption and value.