Every community faces daily challenges that economists traditionally summarize in three fundamental questions: what goods and services to produce, how to produce them, and for whom to produce them?
In answering these questions, economic analysis strives to explain the way society must decide to reconcile the virtually unlimited desires for goods and services with the limited supply capacity due to the scarcity of productive resources. Economic analysis can be divided into two types of economic studies: microeconomics and macroeconomics.
Macroeconomics encompasses all global economic analyses and theories that apply to the entire economic system. Proper macroeconomic analysis emerged as a theory in its own right based on John Maynard Keynes’ General Theory of Employment, Interest, and Money in 1936.
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It brings together individual agents to examine and explain the overall operation, including the level of activity, investment, savings, unemployment, and inflation.
Differences between microeconomics and macroeconomics
Macroeconomics primarily studies the behaviors of individual economic agents and markets individually in the context of partial equilibrium: the determination of prices in a particular market, the production behavior of specific goods and services.
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The distinction between microeconomic analysis and macroeconomic analysis is usually based on the size of the entity studied. The terms micro and macroeconomics come from the Greek words “mikros” and “makros,” which respectively mean “small” and “large.”
In reality, the distinction between microeconomics and macroeconomics goes beyond the size of the unit studied. Microeconomics and macroeconomics follow different approaches.
Microeconomics focuses on a detailed understanding of individual markets, and to reach this level of detail, it eliminates many interactions with other markets. It’s like watching a horse race through binoculars.
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Macroeconomics looks at the interaction of different parts of the economy. It simplifies the blocks to focus on how they adjust and influence each other. It’s like watching the same horse race with the naked eye; the detailed image becomes blurry, but you can focus on the big picture.
The macroeconomic approach can be summarized in four steps:
- Identifying the main variables determining macroeconomic aggregates.
- Studying the relationships between variables: Is there a stable relationship between consumption and income, for example?
- Analyzing the causes and origins of major macroeconomic imbalances: Unemployment, inflation, and more.
- Providing solutions to these problems by implementing effective economic policies.