Macroeconomics, sometimes referred to as micro economics, is a branch of economic theory that studies the interactions of a population as a whole. The concepts and tools of macroeconomics have grown and developed over the past several decades, with particular focus on international trade, monetary policy, budget deficits, interest rates, and international trade arrangements. The study of macroeconomics is thus broad in scope and covers a variety of important topics.
One of the most important insights into the workings of the macro-economy is the concept of inflation. This concept is well explained by the Federal Reserve System’s goal of raising the level of consistent inflation to the target range. Consistent inflation is considered necessary for achieving economic growth. However, the scope of such growth is typically far greater than just increasing consumer prices; other macroeconomic factors, such as trade balances, also need to be taken into account.
The concept of micro economics is slightly less abstract but is just as important, and is what most people think of when they hear the term “microeconomics.” Microeconomics studies the behavior of specific markets, including the production, sale, consumption, distribution, and investment processes of a market. A microeconomy can include a country’s national sales level, national income level, or the value of a given unit of a certain good. There are different theories that explain how microeconomics affect the macro economy.
A popular micro economics concept is the Taylor Process, which examines the behavior of micro prices and the macro-level effects on them. The Taylor Process identifies how changes in a small set of variables affect the response of the whole economy. Another micro concept that is very important to the understanding of macroeconomics is the concept of market concentration. Market concentration is the tendency of a business cycle to become unbalanced, resulting in deviations from a path of expected value. This deviation may occur for any number of reasons, from over-leveraging assets and liabilities to dumping unneeded inventory. If market concentrations are excessive, the result is deficient aggregate demand, a contraction in business activity, and an increase in interest rates, leading to a depreciation of the currency and a decrease in investment.
One of the most important applications of microeconomics in macroeconomics is the concept of unemployment. The concept of unemployment incorporates both unemployment rates and the composition of the workforce. Aggregate demand, which is determined by the production capacity of a nation, fluctuates with the changes in the composition of the workforce, which can include changes in education levels and skill relative to the previous or current state of employment. If all available jobs are being filled by people with the same skill and education level, then unemployment is a measure of under-employment. If a fraction of available jobs are occupied by people of the same skill level and education, then unemployment is said to be excess employment.
Another application of microeconomics in macroeconomics is the concept of deflation. Deflation is usually a result of a recession, when economic activity increases but total spending decreases. The result is that some goods, including durable goods, are more expensive than they would have been in the prior absence of the recession. In the short run, this results in increased inflation (price level) because of the lower cost of goods purchased by the consumer relative to previous prices. In the long run, this results in deflation, or a reduction in real effective exchange rate and in the general level of inflation.
Deflation is said to be a result of a declining inflation rate in the face of rising gdp. This can result in both asset and equity inflation (rising stock market value and real estate market value). The central bank attempts to eliminate excess demand through interest rate cuts and other interventions. The end result is that the central bank ends up losing both its credibility and its power to control the economy. As a result of these deficiencies, many believe that deflation is a major cause of the Great Depression.
In summary, the macroeconomic impacts of changes in domestic level variables are important in determining the health of an economy. It is necessary to consider all of the relevant drivers of inflation and deflation before making any macro policy decisions. For further reading on the topic, you may wish to research the works of some of the most famous economists of modern times.