Key Terms of Macroeconomics

Topics: Economics, Macroeconomics, Unemployment Pages: 14 (3607 words) Published: August 26, 2014


The study of economics is divided by the modern economists into two parts viz. Micro economics and Macro economics. This division is shown in the chart above. Micro economics and Macro economics, both the terms were used in 1933 by Prof. Ragnar Frisch from Oslo University of Norway. Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets. While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.

Basic concept of macroeconomics:

The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. According to P.A Samuelson “Macroeconomics is the study of the behavior of the economy as a whole. It examines the overall level of a nation’s output, employment, prices and foreign trade.” According to J.M Culbertson “Macroeconomic theory is the theory of income, employment, prices and money.”

Subject Matter of Macro Economics (Central Issues)

The subject matter of macro economics are as follows:

1. Determination of National Income:
The first major issue in macro economics is to explain what determines the level of employment and national income in an economy and therefore what causes involuntary unemployment. The level of national income and employment are very low in times of depression as in 1930s in various capitalist countries of the world. This will explain the cause of huge unemployment that emerged in these countries. Classical economists denied that there could be involuntary unemployment of labour and other resources for a long time. Classical economist thought that with changes in wages and prices, unemployment would be automatically removed and full employment established. But this did not appear to be so at the time of great depression in the thirties (1930) and after. Keynes explained the level of employment and national income is determined by aggregate demand and aggregate supply. With aggregate supply curve remaining unchanged in the short run, it is the deficiency of aggregate demand that causes under employment equilibrium with the appearance of involuntary unemployment.

2. Inflation
Inflation is a key concept in macroeconomics, and a major concern for government policymakers, companies, workers and investors. Inflation refers to a broad increase in prices across many goods and services in an economy over a sustained period of time. Conversely, inflation can also be thought of as the erosion in value of an economy's currency (a unit of currency buys fewer goods and services than in prior periods). Inflation means a sustained increase in the aggregate or...
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