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Macroeconomics can be used to analyze how best to influence Government policy goals such as Economic Growth , Price Stability , Full Employment and the attainment of a sustainable Balance Of Payments .


ORIGINS


Until the 1930s most economic analysis did not separate out individual economics behavior from aggregate behavior. With the Great Depression of the 1930s, suffered throughout the developed world at the time, 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 formulated theories to try to explain the Great Depression. Before that time, comprehensive national accounts, as we know them today, would not exist .

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 macroeconomic model, Wharton Econometric Forecasting Associates LINK project, was initiated by Lawrence Klein and was mentioned in his citation for the Nobel Memorial Prize In Economics in 1980 .

Theorists such as Robert Lucas Jr suggested (in the 1970s) that at least some traditional Keynesian (after British economist John Maynard Keynes) 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, and some Keynesians have contested the idea that microeconomic foundations are essential, if the model is analytically useful.

The various schools of thought are not always in direct competition with one another -- even though they sometimes reach differing conclusions. Macroeconomics is an ever evolving area of research. The goal of economic research is not to be "right," but rather to be accurate. It is likely that none of the current schools of economic thought perfectly capture the workings of the economy. They do, however, each contribute a small piece of the overall puzzle. As one learns more about each school of thought, it is possible to combine aspects of each in order to reach an informed synthesis.


ANALYTICAL APPROACHES

The traditional distinction is between two different approaches to economics: Keynesian economics, focusing on demand, and supply-side (or neo-classical) economics, focusing on supply. Neither, of course, can completely neglect the other aspect - it is a question of emphasis. Most schools are fairly clearly based on one or the other approach.

  • Keynesian Economics 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 .


  • Supply-side Economics 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. It places heavy emphasis on Say's Law .



Schools

  • 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 Keynesian Economics , which developed partly in response to new classical economics, strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.

  • Austrian Economics is another Laissez-faire school of macroeconomics. It focuses on the Business Cycle that arises from government or central-bank interference that leads to deviations from the natural rate of interest.

  • Post-Keynesian Economics represents a dissent from mainstream Keynesian economics, emphasizing the role of Uncertainty and the historical process in macroeconomics.

  • New Classical Economics . The 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 it 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-optimizing as new information on the state of the world is revealed. Later yielded an explicit school which argued that macro-economics does not have micro-economic foundations, but is instead the tool of studying economic systems at equilibrium.



POLICY CONCLUSIONS

Different analytical approaches lead to different policy conclusions.

For example, a Keynesian approach would have governments run a surplus during the boom period of Business Cycles and run a deficit during recession. On the other hand, Classical Economists would prefer not to attempt to smooth business cycles, as they believe this will distort the true market. Some argue that using taxation as a method of macroeconomic control has no effect anyway. Because of Ricardian Equivalence , rational individuals will save when they receive tax cuts because they know taxes will have to be raised in the future to pay off the deficit.


SEE ALSO


Macroeconomic concepts:
: Adaptive Expectations -- Balance Of Payments -- Central Bank -- Currency -- 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

Macroeconomists:
: Milton Friedman -- John Maynard Keynes -- Robert Lucas Jr -- Robert Mundell -- Finn E. Kydland -- Edward C. Prescott -- Thomas J. Sargent

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