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What is macroeconomics?

Macroeconomics is the study of how the economy behaves in broad outline without dwelling on much of its interest­ing, but sometimes confusing, detail. Macroeconomics is largely concerned with the behaviour of economic aggreg­ates, such as total national product, total investment, and exports for the entire economy. It is also concerned with the average price of all goods and services, rather than the prices of specific products. These aggregates result from act­ivities in many different markets and from the behaviour of different decision-makers such as consumers, governments, and firms. In contrast, microeconomics (as outlined in Chapters 3-20) deals with the behaviour of individual markets, such as those for wheat, computer chips, or straw­berries, and with the detailed behaviour of individual agents, such as firms and consumers.

In macroeconomics we add together the value of cornflakes, beer, cars, strawberries, haircuts, and restaurant meals along with the value of all other goods and services produced, and we study the aggregate national product. We also average the prices of all goods and services consumed and discuss the general price level for the entire economy-usually just called the price level. In practice, the averages of several different sets of prices are used. For example, one important index measures the average price of the goods and services bought by the typical consumer. In Britain it is known as the retail price index (RP1), while the equivalent in some other countries is called the consumer price index (CP1). An appendix to this chapter discusses how the RPI is calculated.

We know full well that an economy that produces much wheat and few cars differs from one that produces many cars but little wheat. We also know that an economy with cheap wheat and expensive cars differs from one with cheap cars and expensive wheat. Studying aggregates and averages often means missing such important differences, but in return for losing valuable detail we are able to view the big picture.

In macroeconomics we look at the broad range of oppor­tunities and difficulties facing the economy as a whole. When national product rises, the output of most firms, and the incomes of most people, usually rise with it. When interest rates rise, most borrowers, including firms and homeowners, have to make bigger payments on their debts, though many savers will get a higher return on their savings. When the price level rises, virtually everyone in the economy is forced to make adjustments, because of the lower value of money. When the unemployment rate rises, workers are put at an increased risk of losing their jobs and suffering losses in their incomes. These movements in economic aggregates are strongly associated with the eco­nomic well-being of most individuals: the health of the sectors in which they work and the prices of the goods that they purchase. These associations between the health of the macroeconomy and the economic fortunes of many people are the reason why macroeconomic aggregates (par­ticularly inflation, unemployment, interest rates, and the balance of payments) are often in the news.