Introduction to Macroeconomics

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Introduction to Macroeconomics

Macroeconomics is one of the main branches of economics. The best way to understand what macroeconomics is about is perhaps to contrast it with microeconomics, another main branch of economics.

Microeconomics studies parts of the economy. Macroeconomics looks at the whole. In other words, macroeconomics tries to understand what happens in the economy in general, it takes an overview of the economy, whereas microeconomics explains what happens in different parts of the economy separately, taking one at a time.

By “parts of the economy” we mean either groups of people (consumers, investors, workers, potential buyers of this good or that good), firms, groups of firms that produce the same good (industries), markets (buyers and sellers of different goods), and even sectors (agriculture, manufacturing, services). In macroeconomics, these distinctions are not made.

Let us focus on markets, for example. In an economy, there are millions of goods and services produced, thousands of different types of labor, and a large number of (financial) assets people can hold. So, there are millions of markets for goods, thousands of labor markets, and many markets for assets. Microeconomics would study these markets one by one:

Microeconomics

market for hazelnuts,
market for cars,
market for health services,
...
market for farm workers’ labor,
market for industrial workers’ labor,
market for health workers’ labor,
...
market for cash,
market for checking deposits in banks,
market for time deposits,
...
market for short-term government bonds,
market for short-term corporate bonds,
market for long-term bonds,
...

Macroeconomics does not make such distinctions. It combines all markets for different goods and services into a single market where all goods and services are sold, all markets for different types of labor into a single market where all types of labor are sold, all markets for different liquid or short-term assets into a single market where these assets are exchanged, and all relatively less liquid and long-term assets into another single market where all such assets are acquired.

Microeconomics Macroeconomics

market for hazelnuts,
market for cars, “goods” market market for health services,
...
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
market for farm workers’ labor,
market for industrial workers’ labor, “labor” market market for health workers’ labor,
...
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
market for cash,
market for checking deposits in banks, “money” market market for time deposits,
...
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
market for short-term government bonds,
market for short-term corporate bonds, “bond” market market for long-term bonds,
...
- - - - - - - - - - - - - - - - - - - - - - - - - - - -

There is also the “foreign exchange” market, but let us ignore this for the moment (effectively, let us assume for the time being that the economy we are examining is a closed economy). As microeconomics studies these markets, it would focus on variables like the price of the good or service observed in each market together with quantity (or physical amount) of the good produced and sold in that market:

Microeconomics...

studies... and tries to explain...

market for hazelnut price of hazelnut and quantity of hazelnut produced over a year market for cars price of cars and number of cars produced over a year market for health services price of health services and amount of them produced over a year ......

market for farm workers’ laborwage earned by farm workers and number of farm workers employed over a year market for industrial workers’ labor wage earned by industrial workers and number of industrial workers employed over a year market for...
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