Macroeconomics: the Big Picture

Macroeconomics: the Big Picture

I still remember my first ever economics class: I was in tenth grade and had a wonderful teacher, with round glasses that fell down her nose. She showed us a couple of slides; not much of it made sense. The sixth one, however, was getting to the good part: it attempted to provide a definition

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I still remember my first ever economics class: I was in tenth grade and had a wonderful teacher, with round glasses that fell down her nose. She showed us a couple of slides; not much of it made sense. The sixth one, however, was getting to the good part: it attempted to provide a definition for the subject itself. She said it was usually divided in two, with Microeconomics being the easy one to start with. Macroeconomics, on the other hand, was seemingly harder, and because it encompassed so much of the world was more difficult to detail. I have to admit, I didn’t pay as much attention to that as I should have; and now here I am giving her all the reason in the world.

It is exactly one forty-two in the morning of the day I have to submit this piece and I still cannot provide you with a satisfactory answer to what exactly Macroeconomics is. Sure, we can go through the usual dictionary like definition, of the ‘branch concerned with large-scale or general economic factors’, but that doesn’t really help our case. Instead, I chose to look at a book, something we should probably use more often than we do; and it indeed gave me some guidance as to how we should approach this rather ‘general’ topic.

Macroeconomics works in a three-way segment: firstly we have the variables, which combined give us the theories and models. Then, these models are applied to situations and adapt to the changes these suffer. And finally, we question them time and time again, trying to forecast what will happen in future cases. These segments are applied in three different time scales, the short, medium and long runs. And voilà, a social science is born, tons of books are written about it and political commentators can blame it all in the Keynesian-like thinking of southern European countries.

Starting with the basics, Macroeconomics is concerned with the roles of aggregate supply (AS) and aggregate demand (AD) and how these influence the economy. There are two main schools of thought when it comes to these roles and they are the basis for further developed models. Firstly is the Classical Model, which relies on the idea of free markets and self-adjusting variables. In simple terms, when times are good prices go up and when they are bad prices plummet. This model assumes a competitive environment so there should be full employment (or natural level of output). This is, in the end, the variable that matters towards the explanation: the model takes output as being a function of capital (K) and labour (L), and K is had as fixed (doesn’t change in the short run).

After the Great Depression, the Keynesian Model appeared as a new way to describe economic behaviour. Starting with the vital assumption that the economy is not always at full employment, and can operate above or below its given potential. Indeed, while it could be self-correcting like above, it took a long time to do so (hence one of my favourites, by J.M. Keynes himself, ‘in the long run we’re all dead’), so intervention would be needed in this case. This is where we can explain the Phillips Curve (where we can see how well resources are being utilised, if above or below the economy’s potential) and monetary policy (the said intervention) would come into place.

While this is the basis of economic thinking, we can then go further on to including several other variables, such as expectations and how we manage them. As an example variable, we can see how its inclusion results in changes in inflation, growth, and others, such as the balance of payments.

On a final remark, and while I have attempted to enclose all that Macroeconomics is, I have to grant credit to the editor for such a well titled piece, as it is indeed too big of a picture to give the justice it deserves on such short print space.

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