Principles of Macroeconomics Made Easy

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Macroeconomics looks at overall economic performance.
Macroeconomics looks at overall economic performance. (Image: Jupiterimages/Comstock/Getty Images)

Macroeconomics -- derived from the Greek word "macros," meaning "large" -- examines the overall behavior of the economy. It looks at the total output of goods and services, the overall unemployment rate and other aspects of the economy as a whole. Microeconomics -- from the Greek word "mikros," meaning "small" -- focuses instead on foreclosure rates, small-business creation and other specific issues. Local, national and global economic sectors are analyzed in macroeconomic studies.

Productivity and Growth

Countries that produce more goods are highly competitive in the global economy and enjoy a better standard of living than nations with lower productivity. Countries will try to increase their productivity by investing in capital -- valuable assets that help to produce goods and services. Manufacturing equipment, human labor and raw materials are examples of capital. Substantial capital investments in education, research and labor management have contributed to high productivity rates in the United States, Japan and other developed nations.

Economic Indicators

Economists analyze key variables including gross domestic product, inflation rates and unemployment rates to measure the overall health of the economy. Gross domestic product (GDP), for example, measures the value of all goods produced within a country over a given period. The inflation rate measures the increase in prices of goods and services, which indicates changes in supply and demand. The unemployment rate reflects the labor market's response to consumer behavior and labor policies. Union regulations, wage laws and taxes are policies that could affect the labor market.

Classical Theory

Adam Smith, the 18th-century Scottish economist, argued in favor of saving money and producing more capital. This classical approach stressed that a nation can become wealthier if it refrains from excessive consumption and invests in the future by building capital. Excessive spending, classical economists argue, can threaten the economy by causing a paradox of thrift: Consumers will begin saving in an effort to curb their consumption. This results in low demand for goods, ultimately causing a recession.

Keynesian Theory

John Maynard Keynes, the 20th-century English economist, believed government spending could stimulate consumer demand for goods in the economy. He argued that low demand for excess goods could threaten economic health. This strategy influenced many industrialized countries to adopt monetary and fiscal policies in an effort to increase the total demand and consumption of goods and services. Critics of the Keynesian approach argue that this practice leads to low capital growth. They also contend that governments become addicted to spending as a result.

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