Macroeconomics

Macroeconomics is the analysis of the economy as a whole, or the analysis of large subdivisions of the economy; for example inflation, unemployment, and aggregate demand and supply. The study of macroeconomics seeks to further understanding of these principals to aid a country's economic performance as a whole.

Development of Macroeconomics

Macroeconomics is a relatively new field of study, gaining attention during the 1930's; although naturally the principles upon which it is founded have been in existence far longer. During the 1930's it became possible for the first time to collect increasingly detailed economic data on national income, balance of trade and the current account; allowing for more precise analysis of the entire national economy.

The Great Depression

The Great Depression of 1929 was a powerful influence behind the development of macroeconomics, since it highlighted the major flaws in applying microeconomic theory to the national economy. According to microeconomic, or "market-clearing" theory, the large amount of unemployment following the Great Depression should have been adjusted by the "invisible hand" of the markets, whereby wages dropped so the firms took on more workers. However, due to the unemployment and poverty, the demand for goods and services dropped, so firms did not require workers. In response to this situation, the British economist John Maynard Keynes wrote The General Theory of Employment, Interest and Money in which he outlined the limitations of Microeconomics and put forward many founding macroeconomic principals such as aggregate demand [1]. Since then many of Keyne's original theories have been subject to intense scrutiny and critique, notably by monetarists such as Milton Friedman who claim government intervention to correct market failure is inefficient, and private firms motivated by profits and price competitiveness are far better at ironing out market failures.

Schools of Thought

Since the 1930's, two main schools of macroeconomic thought have developed, although within these other sub-groups exist. The two schools are:

• Monetarism- advocated by economists such as Milton Friedman and Anna Schwartz, monetarism rejects Keyne's demand management and government intervention proposals, stating that these create distortions in the market and force out the more efficient private firms.
• Keynesian- this school stems from the original work of John Maynard Keynes, and uses the principal of aggregate demand to explain unemployment and changing levels of economic growth. Keynesian economists usually advocate fiscal policy as a means of correcting market failure.

Sources

• http://www.economyprofessor.com/economictheories/general-theory-of-employment-interest-and-money.php

See Also

• Microeconomics