The Macroeconomics (from Greek μακρός macros "great"; οἶκος , oikos "house" and νόμος , nomos "Act"), including macroeconomics , macroeconomic theory and macroeconomic theory , is part of economics . Macroeconomics is a science that deals with the macroeconomic behavior of economic sectors , with the analysis of macroeconomic markets and their interrelationships.
The term macroeconomics is mostly used synonymously in the literature. However, some authors differentiate between macroeconomics as the science and macroeconomics as the subject of study.
Macroeconomics is the science of macroeconomic processes. Dating from the 18th century Tableau économique by François Quesnay is the first modern macroeconomic Total model. Quesnay modeled a simple economic cycle . He thus explained the economic relations of three classes, consisting of (1) the peasants, (2) the merchants and craftsmen, and (3) the landowners.
Macroeconomics tries to explain the main determinants, the international differences and the temporal development of macroeconomic (macroeconomic) key variables, such as macroeconomic production of goods and services, total income , unemployment , inflation and the balance of payments .
The founder of macroeconomics is John Maynard Keynes , who in 1936 presented the first simultaneous analysis of key macroeconomic variables.
Important sub-areas of macroeconomic theory are national accounts , income and employment theory, growth theory, and business cycle theory . The separation between microeconomics and macroeconomics is problematic at times. Many sub-areas of economics, in particular monetary theory ( monetary theory and theory of monetary policy ), public finance , foreign trade theory and distribution theory , have elements of microeconomics and macroeconomics.
Finally, the focus of macroeconomic theories is the question of the role of the state in the macroeconomic context; Recommendations for economic policy are derived from the theories . Governments try to influence macroeconomic development. Politically defined goals such as price level stability , full employment , external economic equilibrium and / or economic growth are striven for through changes in taxes , interest or government spending (see also magic square ). Macroeconomic parameters play an important role in the political legitimation process, as they are interpreted by voters as an indication of the quality of the work of a government.
Modern macroeconomic theories ( DSGE models ) mostly derive decisions from individual optimizations (so-called microfounding ). Because mere rationality assumptions , according to the Sonnenschein-Mantel-Debreu theorem , have hardly any implications, macroeconomics is more empirically oriented. She chooses the assumptions so that the model results are consistent with stylized facts. These include, for example, the long-term constancy of the capital coefficient or the fact that investments fluctuate more strongly than consumption over the course of the economy.
The macroeconomic analysis tries to simplify the complex economic reality to a manageable number of essential connections. As a rule, the number of markets considered is reduced to four:
- the macroeconomic goods market
- the macroeconomic money market
- the macroeconomic labor market
- the macroeconomic securities market
The homogeneous domestic product is traded on the goods market, which is fictitiously split up into private consumption, state consumption, investments, and imports and exports.
Various explanations exist in macroeconomics. However, it can be justified to speak of only two explanatory models (paradigms). On the one hand there is classical macroeconomics , which was newly founded and refined by monetarism and the new classical macroeconomics . On the other hand is Keynesianism .
Economics is divided into two major main parts, microeconomics and macroeconomics. These cannot be exactly separated from one another, but complement one another.
Microeconomics and macroeconomics both analyze the behavior of economic subjects . The focus of microeconomics is the individual economic subject, whereas macroeconomics focuses on the average behavior of economic subjects. This means that in microeconomics, for example, the demand of a single household is examined, while macroeconomics analyzes the aggregated demand , i.e. the total demand of all households. In addition, areas in macroeconomics are also included in the investigation that are not taken into account in microeconomics, such as the importance of the state or foreign countries .
In summary, the following can be stated: Microeconomics is mainly concerned with individual markets, i.e. with markets for certain goods and their analysis. Macroeconomics, on the other hand, considers the aggregated individual markets such as the goods market or the money market and the resulting overall economic relationships. In doing so, macroeconomics draws on the individual decisions of economic subjects examined in microeconomics.
History of Macroeconomics
The first questions about economic issues can be found in ancient times. In “ Politeia ” Plato already made statements about the advantages of the division of labor, or in the discussion of the value of Aristotle , statements were made about money and interest. These are thoughts that have surely come up earlier.
What is special about the Greeks and Romans, the scholastics and philosophers of natural law , however, is that they did not put economics as such in the foreground, but always looked at economic problems in connection with another science, for example ethics , law or political Philosophy . However, there is no actual economics here. However, one should not underestimate the collaboration of these authors, as their contribution is equivalent to one of the two original sources of economic research.
Another source is the work of various authors who deal with practical and political questions of economic management and administration. These authors include teachers from the administration colleges of the time, bureaucrats, politicians and business people. As they had practical experience, the analytical presentation of their ideas was less important to them than the factual knowledge that they brought in. In the 16th and 17th centuries the number of publications increased so that the main statements of the formulated thoughts coined the name mercantilism . The main task of mercantilism was to support the national trade force and to raise income for the treasury of the princes (also called camera). This is where the term cameralism is derived , which describes German mercantilism. It represents a forerunner of German finance.
A first important figure in the development of economic analysis is Sir William Petty . Petty presented the thesis of the economic “surplus” and thus the decisive property of a classical economics. In the middle of the 18th century in France a group of authors got together and founded a school. They called themselves "les économistes", today they would be called physiocrats . The doctor Francois Quesnay was the founder and head of this facility. He was the first to do a complete analysis of the economic process, including the cycle theory. This achievement is remarkable. The Physiocrats were influenced by Richard Cantillon , who for the first time went into more detail on the problem of allocation and who showed what influence demand has on the composition of economic production through a change in relative prices. Anne Robert Jacques Turgot , who had a close connection to the Physiocrats, also worked out a largely comprehensive economic theory at this time and also made contributions that have made him one of the most outstanding classical economists today.
Classical music began in 1770, so it belongs to the decade in which Turgot's main work and probably the most popular economic book, “An Inquiry into the Nature and Causes of the Wealth of Nations” by Adam Smith, were written. Smith was Professor of Moral Philosophy at the University of Glasgow and the importance of his work came on the one hand from his own analytical efforts, but largely from holding on to what was already there. Through his work, economics was recognized as an independent field of knowledge. If one orientates oneself on Joseph Schumpeter's statement that the knowledge of a science is the knowledge of itself, then this was the step with which the economy became an independent scientific discipline.
The classical period only makes sense if you look at it in the context of the eras that preceded it. With the work of Smith and the contributions of the forerunners as a basis, the economists of the classical period dealt with all the essential questions that make up the content of today's economics.
A key point of classical economy is the principle of harmony. This means the certainty of the functionality of a market economy, as Smith depicts it with his "invisible hand". The "invisible hand" in the form of the price mechanism brought about an order of economic plans due to the rational and individual behavior of the individual. The background of the whole thing is a natural order that should adapt to the given order as much as possible in order to produce the greatest possible social welfare . It is very important that the state stays out of economic life as far as possible. The state should rather fulfill its two important functions, internal and external security as well as the implementation of a suitable legal system with freedom of action and protection of private property .
The main interest of the classic was rather the statements that had already been made about the surplus. For them, the greatest problems were the creation of the surplus, how it should be distributed among the different social classes and its possible use for “luxury consumption” or “saving”. The economists paid particular attention to the use of the surplus. You clearly opt for the second possible use, since an increase in savings serves and increases the “prosperity of nations” in the long term.
The idea of a "Classical" period originated with Karl Marx , who is just as significant as the classics and who saw John Stuart Mill as their last representative. The end of the classical epoch is, if one follows the Marxian classification, in the year 1870 and is at the same time the beginning of the neoclassical.
Marginalism as a heading for marginal observations, which include marginal costs and marginal utility , is without a doubt one of the most important innovations of the neoclassical era . It made it possible to trace economic behavior back to individual individuals. During the classical era, the macroeconomic approach was still in the foreground, while in the neoclassical a universal individual is the focus of the analysis. This view can be described as microeconomic.
Neoclassical marginalism first appeared in value theory, and it also brought about another major change. While the value of a good was still the same as the cost of production for the classics, the early neoclassics are of the opinion that the price that consumers are willing to pay, i.e. the market price, is determined by the marginal utility. The value theory that is used here is, in contrast to the classic, subjectively shaped.
The focus, which is the focus of the considerations, is also different from that in the classical era. Neoclassicism is mainly concerned with how scarce resources are distributed. These considerations led to the result that the supply structure aligns with the demand structure due to the relative price mechanism and thus an optimal allocation is created.
William Stanley Jevons , Carl Menger and Léon Walras should be mentioned as authors who initiated the “marginalist revolution” almost simultaneously and independently of one another . The main theme of her discussion on this subject is marginal utility. By applying marginal utility theory, Jevons and Walras succeeded in introducing common mathematical applications as the standard today .
Alfred Marshall , professor at Cambridge University , was one of the most extraordinary neoclassical writers. The geometric representation of supply and demand functions was developed through his statements on objective and subjective value . The supply curve represents the objective part, the demand curve the subjective part. By combining both functions, one can determine the market price and the natural price. Other important neoclassical authors are Irving Fisher , Vilfredo Pareto , Knut Wicksell and Arthur Cecil Pigou .
Historically speaking, the end of neoclassicism lies at the beginning of the First World War . From an analytical point of view, there is no point in time for this, an end is not precisely dated. The neoclassical type of analysis is still used very often today.
From Keynes to the present
In the second decade of the 20th century , the economist John Maynard Keynes came to the fore , the climax of which was his 1936 work “ General Theory of Employment, Interest and Money ”. It is thanks to Keynes that macroeconomics is so important today.
The focus on macroeconomics instead of microeconomics because of Keynes is connected with the change of the explanatory goal. In Keyn's theory, the employment problem is mainly considered. In his remarks, Keynes mainly dealt with the observation of the degree of utilization of production factors that are not fully employed. This change in perspective is related to two factors. On the one hand with the global economic crisis that was taking place at the time . And second, with the switch from long-term to short-term analysis.
Another major change set in motion by Keynes was the split in economic theory. In addition to the neoclassical analysis technique, Keynes created a second type of analysis. However, this was designed so differently that a comparison is unthinkable.
Macroeconomics in a closed economy
A closed economy is understood to mean an economy without trade relations with foreign countries. Accordingly, exports and imports are zero. This assumption contradicts reality because all modern economies have numerous and complex trade relationships with the rest of the world.
In macroeconomics, the goods market comprises all markets on which goods and services are traded. This is where the aggregate supply and demand of an economy come together. The goods market thus includes both consumption and investment.
When looking at the goods market equilibrium graphically, one encounters the IS function . This represents the abundance of all combinations of interest rate and national income in which there is a balance.
A money market is a place where all monetary transactions take place. Income and expenses are netted and reflected in a certain amount of money. In order to determine the desired demand, one has to take two perspectives. On the one hand, this results from the need to process ongoing transactions immediately. This so-called transaction fund is proportional to income. The higher the income, the more transactions can be made. Second, despite positive but low interest rates, it makes sense to hold money for the sake of wealth if interest rates are expected to rise. With the expected increase in interest rates, price losses for securities are also to be expected. The speculative fund derived from this increases as the interest rate falls. In conclusion, the money supply is determined by the granting of loans or the purchases of securities by the central bank. This can be represented graphically using the LM function . For a given amount of money, the money market equilibrium curve LM runs with a positive slope in the interest-income coordinate system.
Goods money market model
In this model, the two sub-markets of the goods market and money market are now combined. The IS-LM model results from the derivation of the intersection of the two curves . This model is based on the macroeconomic fixed price model by John R. Hicks . By combining the money and goods markets, the IS-LM model determines the equilibrium values of the interest rate and the national income. It is suitable for short-term investigations into global control.
Supply and demand for labor meet in the labor market . Employees act as providers of work. The companies then ask about them. For them, work represents a factor of production. Accordingly, the demand for labor is also to be seen in connection with the production condition, which is described by the economic production function. In the past few years the labor market has had to struggle more and more with weak growth. This was particularly evident from the high level of unemployment .
Goods money market model supplemented by a labor market model
As already mentioned, the goods money market model represents the amalgamation of the two sub-markets. The graphic representation is made by the IS-LM model. If we now consider the equilibrium in the labor market, we arrive at the AS-AD model . This is based on the assumption that there is a natural unemployment rate that will arise in the medium term. Only when actual and natural unemployment coincide does an equilibrium arise on the labor market. The AS curve is now used to look further at the overall economic supply. As a result, a completely price-elastic offer (and therefore constant prices) is no longer assumed - as in the IS-LM model. Rather, one now considers possible price reactions and their consequences for the overall economic equilibrium.
Macroeconomics in an Open Economy
In the open economy , foreign countries are included, i. H. In contrast to a closed economy, imports and exports play a decisive role. The external relations of an economy are of particular importance here. These are recorded in the foreign trade accounts , which are ancillary accounts of the national accounts (VGR). The most important parts of the foreign trade accounts are the balance of payments and the recording of exchange rates.
Total macroeconomic analysis
The total macroeconomic analysis considers all markets (goods, money, securities and labor markets) in context. It includes all interactions between consumers and producers in the markets, i.e. the actions of all economic subjects. For the sake of simplicity, certain fixed data and behaviors are used and the analysis is reduced to price theory and striving towards equilibrium. Although this type of analysis is theoretically more comprehensive, partial models are mostly used for cost reasons or because of the time-consuming data acquisition.
The total analysis examines the following questions in particular:
- Does such a balance exist under the given conditions?
- Is the balance clear?
- Do economic subjects strive back to a position of equilibrium when they deviate from equilibrium?
Finance, wage and fiscal policy
The financial policy includes any decisions on budgets or budgets in the state, especially the determination of the amount and type of income and expenditure.
Wage policy includes all measures to determine the level, structure and alignment of wages.
The perfect macroeconomic labor market (neoclassical approach) is partly incompatible with modern economic reality. Free wage formation from demand and supply is possible in parts of the labor market, but wage rates are usually negotiated between the trade unions and the employers' associations and set out in collective agreements.
The determination of taxes T and government expenditures G (increase or decrease) by the government is called fiscal policy . This includes all decisions on government purchases, transfer payments and the tax structure. Fiscal policy is a part of fiscal policy.
If a government budget deficit is to be reduced by the government increasing taxes or reducing government spending, this is called a contractionary fiscal policy. If, on the other hand, the government deficit is widened by a tax cut or an increase in government spending, this is referred to as expansionary fiscal policy.
A distinction is made between the following macroeconomic crises:
Inflation is an increase in the general price level over a long period of time.
Deflation is negative inflation, which means that the general price level falls.
Depression is a long lasting recession.
Hyperinflation means very high inflation.
A recession is a negative GDP growth in two or more consecutive quarters (negative growth rates).
An economic phase without economic growth is called stagnation .
Stagflation is a combination of stagnation and inflation.
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