What is Macroeconomics?

Definition: Macroeconomics is the study of the elements that explain and regulate an entire economic system. In other words, it is the branch that deals with the dynamics of economies as a whole.

What Does Macroeconomics Mean?

Macroeconomic topics are very well known by individuals even without them noticing. The newspapers and media are filled with macroeconomic information such as inflation and unemployment rates, gross domestic product figures, balance of payments reports, interest rate changes and policies, among others. All these elements are studied by macroeconomics. By analyzing the behavior of each of them economists can develop new theories to increase the effectiveness of economic policies. In most countries, macroeconomic policies are handled by Central Banks.

In the case of the US, the Federal Reserve is the institution in charge of establishing policies to keep the economy in good health. The main difference between macro and microeconomics is that macro-economics describes the economy as an entire system and microeconomics is focused in the dynamics of individual businesses, markets or industries. The goal of macroeconomic policies is to ensure the economy’s overall stability.

Here’s an illustration that might help explain this concept further.

Example

Mr. Hardwell is the Chief Investment Officer of a financial company. His job is to identify and evaluate new investment opportunities for the company. A few days ago he received a proposal from a Japanese company that is offering a given percentage of shares to fund its expansion projects. The company’s main business is domestic, this means they sell their goods mostly in the Japanese market. That means Mr. Hardwell needs to assess that market before he can review the company as an individual entity. What would be the role of macroeconomics in this analysis?

As we previously discussed, macroeconomics explains and regulates the dynamics of an entire economic system. Mr. Hardwell must research the macroeconomic status of the Japanese economy to understand how attractive and safe this investment opportunity actually is. By analyzing variables as inflation, currency rate, unemployment level and interest rate he can start shaping a better understanding of the potentialities of this business deal.