What is Macroeconomics? - Definition & Principles

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Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

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Steven Scalia

Steven completed a Graduate Degree is Chartered Accountancy at Concordia University. He has performed as Teacher's Assistant and Assistant Lecturer in University.

Macroeconomics is the overall study of an economy's performance, behavior, and driving forces. Learn about the definition, importance, and principles of macroeconomics, and explore its relevance to economic output, unemployment, inflation, and deflation. Updated: 10/11/2021

What is Macroeconomics?

Macroeconomics is the study of economics involving phenomena that affects an entire economy, including inflation, unemployment, price levels, economic growth, economic decline and the relationship between all of these. While microeconomics looks at how households and businesses make decisions and behave in the marketplace, macroeconomics looks at the big picture - it analyzes the entire economy.

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  • 0:29 Importance of Macroeconomics
  • 1:10 Principles
  • 1:26 Economic Output
  • 3:34 Unemployment
  • 4:29 Inflation and Deflation
  • 5:03 Lesson Summary
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Importance of Macroeconomics

We live in a complex and interconnected world. No one is unaffected by the economy. Most of us depend on the economy to provide job or business opportunities so we can make money to buy the goods and services we need to survive and function in modern society. The study of macroeconomics allows us to better understand what makes our economy grow and what makes it contract. A growing economy provides opportunities for better lives, while a contracting economy can be disastrous for most everyone. Macroeconomics provides the analysis for proper policy making so that we can develop and nurture the best economy possible.

Principles

Macroeconomic study focuses on three broad areas and the interrelationships between them. These three concepts affect all participants in an economy, including consumers, workers, producers and government. Let's look at each of these concepts.

Economic Output

Macroeconomics studies the national output, or income, of a country. National economic output is the total value of all goods and services produced in an economy during a specific time period. Economists measure national output by calculating the gross domestic product (GDP), which is the market value of final goods and services that an economy produces during a specific period of time. Economists will use the term real GDP, which is GDP valued at a constant price level, to compare current output with past output. This comparison will tell you if the economy is growing, is stagnant, or is contracting.

The basic model used in macroeconomics to study economic fluctuations is the model of aggregate demand and aggregate supply. The model involves two variables: the economy's output, which is measured by real GDP, and the economy's overall price level, measured by a price index (usually the GDP deflator or CPI). You can plot the general price level in an economy on the vertical axis of a graph and the quantity of output on the horizontal axis. The aggregate supply curve is upward sloping in the short-run, but vertical in the long-run. The aggregate demand curve is downward slopping. Economic output and price level will move towards the point where aggregate supply equals aggregate demand.

Fluctuations in economic output are generally caused by one of two things. First, fluctuations can occur when the aggregate demand shifts. If the aggregate demand curve shifts to the left, output and prices will decline. If the curve shifts to the right, output and prices will rise. Second, economic fluctuations may be caused by a shift in aggregate supply. A right shift in the aggregate supply curve means that the quantity of goods and services supplied will increase at a particular price level. If the short-term aggregate supply curve shifts to the left, output will fall and prices will rise - this is called stagflation.

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Additional Activities

Macroeconomics - A Practical Exercise:

The following exercise is designed to help students understand which economic situations are related to Macroeconomics while also being able to identify its three major concepts.

Exercise

You are studying the economy of Kalamazoo Island. The national economic bureau of Kalamazoo provides you with the following economic events and fact related to the previous calendar year:

1. Kalamazoo's unemployment rate reached a record low of 9% in 2019.

2. Kalamazoo's central bank implemented an aggressive expansionary monetary policy by decreasing the discount rate. This, in turn, has led to a rise in consumption and an increase in the overall price level as measured by the Consumer Price Index.

3. Kalamazoo's nationalized electricity firm, Kalamapower Inc., posted a profit of $2 Million in 2019.

4. The Gross Domestic Product of Kalamazoo rose 6% in 2019, mostly due to the implementation of the mining industry on the island.

5. Kalamazoo's only airline, Kalamair, increased prices in 2019, which led to higher profits.

Required:

For each fact presented, determine if this fact is useful in the study of Macroeconomics in Kalamazoo and, if so, what is the related Macroeconomics concept.

Solution:

FactRelevant to Macroeconomics?Macroeconomics Concept
1YesUnemployment
2YesInflation
3NoN/A
4YesEconomic Output
5NoN/A

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