What is macroeconomics?

Macroeconomics is the branch of economics that studies the overall performance, structure, behavior, and decision-making of the entire economy, including regional, national, and global levels. It covers topics such as GDP, unemployment, inflation, consumption, savings, investment, trade, and international finance. Unlike microeconomics, which focuses on individual markets, macroeconomics looks at large-scale phenomena and aggregate variables. It is categorized into short-term fluctuations, medium-term structural levels, and long-term growth. The field originated in 1936 with John Maynard Keynes' book The General Theory of Employment, Interest and Money and has since evolved through contributions from various schools of thought.

What is unemployment in macroeconomics?

The unemployment rate is measured as the percentage of the labor force that is actively looking for a job but cannot find one. People who are retired, in training, or who have stopped looking due to lack of prospects are not counted in the labor force. Unemployment has two main components: cyclical unemployment, which is related to economic fluctuations, and structural or natural unemployment, which reflects the average level of unemployment in the long run and is caused by market inefficiencies.

Cyclical unemployment occurs during periods of economic downturn and is described by Okun's law, which links GDP growth to a decline in unemployment. Structural unemployment is present even in the absence of cyclical fluctuations. It arises from factors such as difficulty in finding suitable jobs due to skill or information mismatches, companies keeping wages above market levels to increase productivity, the influence of labor unions that support the earnings of their members, and the establishment of minimum wages that may prevent rates from falling to market levels, especially for unskilled workers.

What is inflation?

Inflation is a general increase in prices in an economy, while deflation denotes a decrease in prices. Changes in the price level are tracked using price indices. Inflation increases when the economy overheats and grows too fast, while a downturn in the economy can lead to lower inflation or even deflation.

The monetarist quantity theory of money states that changes in the price level are directly related to changes in the money supply. Although there is a positive correlation between money supply growth and inflation over the long-run horizon, this theory has proven unreliable over the short and medium term and is no longer used by central banks as a practical guide.

How does an economy grow?

Long-term economic growth is explained by the Solow and endogenous growth models. The Solow model links growth to capital, labor, and technology, but considers technological progress as an external factor. Endogenous models include technological change and learning as internal mechanisms of growth.

Monetary Policy

Central banks manage monetary policy through regulation of short-term interest rates, influencing demand, employment and inflation. Inflation targeting is prevalent in developed economies, while developing economies are more likely to focus on maintaining a fixed exchange rate. In a zero-rate environment, unconventional measures such as quantitative easing or long-term bond operations are used.

However, the impact of fiscal policy can be limited by crowding out effects. When the government increases spending, it can reduce resources for the private sector, and higher interest rates can deter investment. In some cases, government spending may completely substitute for the private sector without adding new output.

Some fiscal policy is implemented automatically through stabilizers, such as unemployment benefits and lower tax revenues during periods of economic downturn. These mechanisms operate without the delays characteristic of discretionary measures and help mitigate the impact of crises.

Monetary policy is preferable to fiscal policy for managing the economy because it is implemented by independent central banks with less delay. However, in the presence of large shocks, low interest rates or a fixed exchange rate, fiscal policy becomes a more effective tool.

Why do economic crises occur?

Economic crises occur for many reasons, but they are often related to imbalances in key economic indicators such as supply and demand, debt levels and liquidity. One of the main causes of crises is overproduction or, conversely, underproduction of goods and services. When supply exceeds demand, prices fall, leading to company bankruptcies and rising unemployment. While lack of production can cause shortages of goods, price increases and inflation, which also leads to economic instability.

Another important cause of crises are financial bubbles that can form in stock markets, real estate or other assets. When the prices of these assets become artificially high, they plummet, leading to financial losses for investors, bank and company failures, and global economic turmoil. Policy mistakes, such as ineffective monetary policy or abrupt changes in taxation, can also trigger a crisis because they disrupt economic stability, increasing uncertainty among businesses and consumers.

Conclusion

Macroeconomics plays a central role in understanding how national and global economies function. By studying key indicators such as inflation, unemployment, and economic growth, as well as public policy instruments, macroeconomics helps predict trends, make strategic decisions, and address economic challenges. It is a discipline without which it is impossible to imagine effective management of economic processes.