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Macroeconomics is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices. Macroeconomics can be used to analyze how best to influence policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments.

Origins of Macroeconomic thought

Until the 1930s most economic analysis concentrated on individual firms and industries. With the Great Depression of the 1930s, however, and the development of the concept of national income and product statistics, the field of macroeconomics began to expand. Particularly influential were the ideas of John Maynard Keynes, who used the concept of aggregate demand to explain fluctuations in output and unemployment. Keynesian economics is based on his ideas.

One of the challenges of economics has been a struggle to reconcile macroeconomic and microeconomic models. Starting in the 1950s, macroeconomists developed micro-based models of macroeconomic behavior (such as the consumption function). Dutch economist Jan Tinbergen developed the first comprehensive national macroeconomic model, which he first built for the Netherlands and later applied to the United States and the United Kingdom after World War II. The first global macroecomomic model, Wharton Econometric Forecasting Associates LINK project, was initiated by Lawrence Klein and was mentioned in his citation for the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1980.

Theorists such as Robert Lucas Jr suggested (in the 1970s) that at least some traditional Keynesian macroeconomic models were questionable as they were not derived from assumptions about individual behavior. However, New Keynesian macroeconomics has generally presented microeconomic models to shore up their macroeconomic theorizing, while the Lucas critique has fallen from favor.

In 2004, the Norwegian Finn E. Kydland and the American Edward C. Prescott, were awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for their work in this area.

Today the main schools of macroeconomic thought are as follows:

  • Keynesian economics, which focuses on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies.
  • Monetarism, led by Milton Friedman, which holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time.
  • New classical economics, which explores the implications of rational expectations. Their original theoretical impetus was the charge that Keynesian economics lacks microeconomic foundations -- i.e. its assertions are not founded in basic economic theory. This school emerged during the 1970s. This school asserts that does not make sense to claim that the economy at any time might be "out-of-equilibrium". Fluctuations in aggregate variables follow from the individuals in the society continuously re-optimize as new information of the state of the world is revealed.
  • New Keynesian economics, which developed partly in response to new classical economics. It strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.
  • Supply-side economics, which delineates quite clearly the roles of monetary policy and fiscal policy. The focus for monetary policy should be purely on the price of money as determined by the supply of money and the demand for money. It advocates a monetary policy that directly targets the value of money and does not target interest rates at all. Typically the value of money is measured by reference to gold or some other reference. The focus of fiscal policy is to raise revenue for worthy government investments with a clear recognition of the impact that taxation has on domestic trade.

See also

Macroeconomic concepts:

Adaptive expectations -- Balance of payments -- Central bank -- Currency -- Economic rationalism -- Gold standard -- Gresham's Law -- Inflation -- IS/LM model -- Money -- Measures of national income and output -- Monetary policy -- National Income and Product Accounts -- Purchasing power parity -- Rational Expectations -- Reaganomics -- Recession -- Stockholm school -- Unemployment

Macroeconomic schools:

Austrian economics -- Keynesian economics -- Monetarism -- New classical economics -- New Keynesian economics -- Supply side economics -- Welfare economics


Milton Friedman -- John Maynard Keynes -- Robert Lucas Jr -- Robert Mundell -- Finn E. Kydland -- Edward C. Prescott -- Thomas J. Sargent -- Jose Victor Rios Rull

Related topics:

Development economics -- Economics -- Political economy -- List of economics topics -- List of economic geography topics -- List of international trade topics -- Important publications in macroeconomics

Last updated: 07-30-2005 16:47:57
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