Seeing the forest for the trees – An introduction to Macroeconomics

Most Economics courses begin with a semester or more of Microeconomics before moving into Macroeconomics. The transition between these two distinct areas of study is less smooth than that between units in other courses, as the tools, models and terminology employed in Macro will appear completely new to most students. I find it important, therefore, to prepare new Macroeconomics students for the months ahead by introducing them to some of the differences between Micro and Macro.

A teacher of mine once explained the difference between Micro and Macro using the example of a tree and a forest. Microeconomics is the like the study of an individual tree standing in a thick forest of thousands of trees of different species. A microeconomist might study the systems that make an individual tree function efficiently, providing it with the nutrients it requires to thrive in the forest. A macroeconomist, on the other hand, takes a broader look at the forest as a whole and observes how the thousands of trees work together in conjunction with the sun, the soil, the oxygen, nitrogen, and water in the environment that make the entire forest function efficiently as one living ecosystem.

The tree in this metaphor is like an individual market. This may be a product market like the market for cars, or a resource market like the market for factory workers. Microeconomists will study the characteristics of a individual markets: the producers and their costs, the trade-offs and challenges presented by competition or the inefficiencies that result from a lack thereof, and the buyers, the alternatives and trade-offs they face, the benefits they receive and the decisions they make based on these factors. Microeconomics concerns itself not with the health of the economy as a whole, rather with the individual markets, the firms, and the consumers within the economy and the challenges of efficiency and resource allocation faced by various stakeholders.

Macroeconomics, on the other hand, studies the health of the economy as a whole. Macro deals with aggregates, or “collections of specific economic units treated as if they were one. ” For example, instead of studying the price of a product, as a microeconomist would, a macroeconomist looks at the average price level in the whole economy. Whereas a microeconomist looks at supply and demand in a particular market, a macroeconomist studies aggregate supply and aggregate demand, assessing the collective marginal benefits of all consumers and marginal costs of all producers. Instead of quantity supplied, the macroeconomist examines aggregate output, or gross domestic product. Instead of anunderallocation and overallocation of resources, the macroeconomists concerns herself with recession and unemployment or with economic growth and inflation.

When it comes to the role of government, macroeconomics has a lot more to say about the role a country’s government should play in managing the economy as a whole. A major theme of microeconomics is that competitive markets, when left alone by government, tend to achieve an efficient allocation of society’s scarce resources. While market failures exist, government’s starting point is generally the assumption that markets are efficient. In Macro, however, the role of government lies at the forefront of our understanding of how nations’ economies work. Through government’s collection of taxes and the provision of public goods, or a central bank’s control of the money supply and interest rates, “top-down” intervention in the promotion of certain macroeconomic objectives is constantly considered and evaluated by macroeconomists.

Why is an understanding of Macroeconomics important?

Microeconomics provides us with the tools and models needed to understand how businesses and consumers interact in the markets for individual goods and services, as well as how business can go about maximizing their profits or achieving other possible aims such as increasing their share of sales in a market.

Lowering costs = less benefits. Source: The Intercept

Macroeconomics, on the other hand, provides us with tools needed to be informed citizens in democratic society. Knowing how government policies in the areas of taxation and government spending can impact the levels of employment, prices, and inequality in society empowers citizens to make informed choices when electing political leaders. In the United States today citizens are learning the hard way that a lack of knowledge of macroeconomics can have dire consequences for the populace as our elected officials embark on a government budget that will slash spending on agencies that provide jobs and other benefits for hundreds of millions of Americans. The Trump administration’s focus on slashing costs without regard for the resulting loss of social benefits is a stark example of the dangers that arise when the majority of a country’s citizens make electoral decision without a clear understanding of their macroeconomic implications.

So here we go. For the next six months we’ll learn all about how a nation’s economic performance is measured, we’ll learn the models economists use to analyze national economic performance, the objectives towards which government policies should aim and the tools governments can use to achieve those objectives. By the end of this section of the course students will not only be prepared to do well on their exams, but more importantly they’ll be better informed citizens equipped with the knowledge to participate in the democratic processes of their respective countries, ready to hold their political leaders accountable in their promises to look after the interests of the society they claim to represent.