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Introduction to macroeconomics

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Last editedMay 20213 min read

From inflation to unemployment, big-picture economic variables are all part of macroeconomics. For businesses, a macroeconomic analysis can help with decision-making, whether you’re considering expanding production or branching out into a new market.

Macroeconomics definition

The study of economics divides its focus into several branches, one of which is macroeconomics. The macroeconomics definition is the study of how the large-scale economy behaves. It includes all the factors or variables that impact the market, including gross domestic product, inflation, economic growth, and unemployment figures. Macroeconomics analyses each of these components and how they influence one another.

By understanding macroeconomics, you can unpack the driving factors behind economic growth and contraction. Government entities use macroeconomic theory when forming monetary and fiscal policy. Yet this is useful not only for governments and banks, but also for small businesses who must understand their own place within the wider market. Investors can also use the theories contained in macroeconomics when planning their next move, by investigating how the market behaves.

Microeconomics vs. macroeconomics

The flip side to macroeconomics is microeconomics, which narrows down its focus to factors that drive individual and business behaviour. Microeconomics looks at what happens when individual actors make financial decisions, and how these decisions interact with one another. As part of microeconomic theory, individuals are broken down into smaller groups like business owners, buyers, and sellers.

Yet rather than looking at the differences in microeconomics vs. macroeconomics, it’s more helpful to examine how these variables influence one another. For example, unemployment levels are a macroeconomic variable. However, higher unemployment can drive individual purchasing decisions or company hiring, which are microeconomic factors.

Macroeconomic objectives

This field of study is concerned with policies that impact the economy as a whole. As you can imagine, this makes it a rather broad field. However, there are four primary macroeconomic objectives.

1. Low unemployment

One of the first macroeconomic objectives is to reduce unemployment to as low a number as possible. This objective is measured with metrics like the UK claimant count. This measure counts anyone out of work and claiming benefits. However, the claimant count doesn’t include those on sickness benefits or unemployed workers too young to claim, so to supplement the claimant count, you can also look at macroeconomics variables like the International Labour Organisation (ILO) measure.

2. Sustainable economic growth

Growth is the second major objective of macroeconomics, typically measured by the rate of change of Gross Domestic Product (GDP). When the economy is growing, GDP increases accordingly as businesses produce more goods and services. Gross National Product (GNP) is also a useful measure, adding income from foreign assets as well. In either case, growth figures are published on a regular basis to help economists take stock of the country’s financial health. Ideally, an economy will grow at a steady yet sustainable rate each year.

3. Price stability

In addition to unemployment and growth, macroeconomic theory looks into variables like inflation. You can measure price stability using metrics like the Retail Price Index (RPI), which should show an inflation rate of zero if prices are stable. However, this is very difficult to achieve in practice, so most governments aim for a low inflation percentage as their objective.

4. Balance of payments

This objective examines the flow of money both in and out of the UK. The Current Account looks at the country’s export of goods and services in relation to its imports. Ideally, it should be earning enough from its exports to pay for all imports. If this is out of balance, the country slides into a deficit.

Macroeconomic variables

We’ve touched on several macroeconomic variables above through wider objectives. These are used to measure the economy’s current state and forecast where it’s going, identifying potential risks along the way. Here are some of the most important macroeconomic variables to monitor:

  • GDP growth

  • Money supply

  • Unemployment rate

  • Inflation rate

  • Government debt

  • Current account

  • Government deficit

  • Stock market volatility

Looking at variables like these together gives you a big-picture view of the market.

Limits of macroeconomics

Keeping track of macroeconomic variables and objectives lets you take stock of the market, which is important for governments, lenders, investors, and business owners alike. Yet there are some limitations to macroeconomic theory to keep in mind. Theories don’t always factor in the realities of human behaviour, nor do they include the smaller details like regulation and taxation.

Be sure to look at both real-world figures as well as the wider macroeconomic theories before making any financial decision.

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