Overview
Macroeconomics looks at the big picture: growth, inflation, and unemployment. It asks why economies boom and bust, and what governments can do about it.
Core Idea
Aggregate Demand and Supply: Just like supply and demand for a single product, but for everything produced in a country. GDP (Gross Domestic Product): The total value of all goods and services produced.
Formal Definition (if applicable)
Fiscal Policy: Government use of spending and taxation to influence the economy (Congress/Parliament). Monetary Policy: Central bank management of money supply and interest rates (The Fed).
Intuition
The economy is like a car.
- GDP: Speed.
- Unemployment: Engine sputtering.
- Inflation: Overheating.
- Fiscal/Monetary Policy: The gas pedal and brakes used to keep the car driving smoothly.
Examples
- The Great Depression: A massive failure of aggregate demand.
- Hyperinflation: When money loses value rapidly (e.g., Zimbabwe, Weimar Germany).
- The 2008 Financial Crisis: A collapse in the housing market triggering a global recession.
Common Misconceptions
- “Government debt is like household debt.” (Governments can print money and live forever; households cannot.)
- “Saving is always good.” (Paradox of Thrift: If everyone saves, no one spends, and the economy crashes.)
Related Concepts
- Keynesian Economics: The view that government intervention is necessary to stabilize the economy.
- Supply-Side Economics: The view that cutting taxes and regulation drives growth.
- Business Cycle: The natural rise and fall of economic growth over time.
Applications
- Central Banking: Setting interest rates to control inflation.
- Government Budgeting: Deciding how much to tax and spend.
- Investment: Understanding the economic climate.
Criticism / Limitations
Macroeconomic forecasting is notoriously difficult. “Economists have predicted nine of the last five recessions.”
Further Reading
- Keynes, The General Theory of Employment, Interest and Money
- Friedman, Capitalism and Freedom