Macroeconomics is a branch of economics that deals with how an economy functions on a large scale. It differs from microeconomics, which deals with how individual economic players, such as consumers and firms, make decisions.
What is macroeconomics?
Macroeconomics is concerned with understanding economy-wide events such as the total amount of goods and services produced, the level of unemployment, and the general behaviour of prices. The objective of macroeconomic study is to investigate principles, problems, and policies related to achievement of full employment and expansion of production capacity. It deals with how different economic sectors such as households, governments and industry make their decisions.
Macro economists employ aggregate measures such as gross domestic product (GDP), unemployment rates, and the consumer price index (CPI) to analyse large-scale consequences of individual decisions. The two main areas of macroeconomic research are long-term economic growth and shorter-term business cycles.
Over the years many economists revolutionised macroeconomic thinking with their ideas. The classical school of economic thought believed that market forces would correct problems such as rising unemployment and recessions and any intervention by the government would be counter-productive.
However, during the Great Depression of the 1930s, existing economic theory was unable either to explain the causes of the severe worldwide economic collapse or to provide an adequate policy solution to jump-start production and employment. British economist John Maynard Keynes overturned the then-prevailing idea that free markets would automatically provide full employment.
What is Keynesian theory?
Keynes's theory or the Keynesian theory argues that state intervention is necessary to moderate the booms and busts in economic activity, otherwise known as the business cycle. Keynes ushered in a new era of macroeconomic thought that viewed the economy as something that the government should actively manage. Several schools of thought have developed since including the monetary model of macroeconomics and rational-expectations hypothesis.