Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national economy as a whole. Macroeconomists seek to understand the determinants of aggregate trends in an economy with particular focus on national income, unemployment, inflation, investment, and international trade. In contrast, microeconomics is primarily focused on the determination of prices and the role of prices in allocating scarce resources. In particular, the Great Depression of the 1930s led economists to try to understand its causes, and thus to be able to avoid similar situations causing such suffering in the future.
While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy. Accurate models support successful development of the economy, allowing a society or organization to maintain stability and to attain successful growth when appropriate, allowing not only the economy of the whole but also the individual members to prosper.
The first published use of the term macroeconomics was by the Norwegian economist Ragnar Frisch in 1933, and before this, there already was an effort to understand many of the broad elements of the field.
Until the 1930s, most economic analysis did not separate out individual behavior from aggregate behavior. With the Great Depression of the 1930s and the development of the concept of national income and product statistics, the field of macroeconomics began to expand. Before that time, comprehensive national accounts, as we know them today, did not exist. Theoretically, the ideas of the British economist John Maynard Keynes, who worked on explaining the Great Depression, were particularly influential.
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 macroeconomic behavior, 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 macroeconomic model, Wharton Econometric Forecasting Associates LINK project, was initiated by Lawrence Klein and was mentioned in his citation for the Nobel Memorial Prize in Economics in 1980.
Theorists such as Robert Lucas Jr. suggested (in the 1970s) that at least some traditional Keynesian (after John Maynard Keynes) macroeconomic models were questionable as they were not derived from assumptions about individual behavior, but instead based on observed past correlations between macroeconomic variables. However, New Keynesian macroeconomics has generally presented microeconomic models to shore up their macroeconomic theorizing, and some Keynesians have contested the idea that microeconomic foundations are essential, if the model is analytically useful. An analogy might be that the fact that quantum physics is not fully consistent with relativity theory does not mean that relativity is false. Many important microeconomic assumptions have never been proved, and some have proved wrong.
There exists vigorous debates among adherents to each of the various schools. Despite this, the goal of economic research is not to be "right," but rather to be useful. An economic model should accurately reproduce observations beyond the data used to calibrate or fit the model. None of the current schools of economic thought perfectly capture the workings of the economy, however each approach contributes a unique perspective to the overall puzzle. As one learns more about each school of thought, it is possible to combine aspects of each in order to reach an informed synthesis, which is the ideal.
The traditional distinction is between two different approaches to economics: Keynesian economics, focusing on demand; and supply-side (or neo-classical) economics, focusing on supply. Neither view is typically endorsed to the complete exclusion of the other, but most schools do tend clearly to emphasize one or the other as a theoretical foundation.
The idea of business cycles is that of economic volatility and the concept that this volatility usually occurs in a cyclical manner with highs of economic health and lows of recession or depression. A great deal of study has gone into trying to understand what causes the upturns and downturns of business cycles and whether or not they can actually be influenced by conscious efforts. Some theories as to the causes of the business cycle include:
Economic growth is an increase in the amount of goods and services produced within an economy (also known as the amount of value added within an economy). Economic growth is measured using the term "gross domestic product." Ideas about what can cause economic growth have evolved over human history. It has variously been suggested that growth is driven by exports, imports, manufacturing, diversification, specialization, isolationism, protectionism, free trade, and others. There is some element of truth to each of these as there is no exact formula that has consistently succeeded in growing economies.
In order to try to avoid major economic shocks, such as great depression, governments make adjustments through policy changes which they hope will succeed in stabilizing the economy. Governments believe that the success of these adjustments is necessary to maintain stability and continue growth. This economic management is achieved through two types of strategies.
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