Macroeconomics: Difference between revisions

Content deleted Content added

Inline

Revision as of 17:46, 6 November 2005

Macroeconomics is the economics sub-field of study that considers aggregate behavior, i.e. the study of the sum of individual economic decisions. This is in contrast to microeconomics which is the study of the economic behaviour of individual consumers, firms, and industries.

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 of the, 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 formulated theories to try to explain the great depression.

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, and some Keynesians have contested the idea that microeconomic foundations are essential, if the model is analytically useful.

It is important to understand that 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, 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.

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.

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. It 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, 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 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.
Rational Expectations represents a conservative school of macro-economics lead by Lukacs, Prescott and Barro. It concentrates on the behavior at infinity of rational economic actors and the removal of barriers to the selection of rational strategies. It utilizes game theory among perfectly rational players to determine what the best strategy would be in the absence of other effects, and then in a normative fashion argues for the removal of "economic friction".

Policy conclusions

Different analytical approaches lead to different policy conclusions.

This economics-related article is a stub. You can help Wikipedia by expanding it.

External links

International Food Policy Research Institute

@@ Line 12: / Line 12: @@
 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 economics | 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.
-It is important to understand that 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.
+It is important to understand that 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==