Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study aggregate measures of the economy, such as output or gross domestic product (GDP), national income, unemployment, inflation, consumption, saving, investment, or trade. Macroeconomics is primarily focused on questions that help to understand aggregate variables in relation to long-run economic growth. Macroeconomics and microeconomics are the two most general fields in economics. Given macroeconomists focus on large-scale phenomena, or aggregate variables, they differ significantly from microeconomists who study markets and decision making at a smaller level of analysis, such as firms or consumers. This divide is institutionalized in the field of economics, given the differences in both methods and outcomes of interest. Macroeconomics is further divided into topics based on the time frame of analysis: short-term fluctuations over the business cycle, medium-term determinants of aggregate variables, such as unemployment, that are unaffected by short-term shocks, and long-term economic growth. The field also includes analysis of monetary and fiscal policies, particularly where they target stabilization of certain indicators or the rate of economic growth. Macroeconomics, as a separate field of research and study, is generally recognized to have begun in 1936, when John Maynard Keynes published his The General Theory of Employment, Interest and Money, but its intellectual predecessors are much older. Swedish economist Knut Wicksell wrote the book Interest and Prices (1898), translated into English in 1936, is considered to be the pioneer of macroeconomics, while Keynes who introduced national income accounting and various related concepts can be said to be the founding father of macroeconomics as a formal discipline. Since World War II, various macroeconomic schools of thought like Keynesians, monetarists, new classical and new Keynesian economists have made contributions to the development of the mainstream research.
Basic concepts Macroeconomics encompasses a variety of concepts and variables, but above all, the three central macroeconomic variables are output, unemployment, and inflation. Besides, the time horizon varies for different types of macroeconomic topics, and this distinction is crucial for many research and policy debates. A further important dimension is that of an economy's openness, economic theory distinguishing sharply between closed economies and open economies. It is usual to distinguish between three time horizons in macroeconomics, each having its own focus on, e.g., the determination of output:
the short run (e.g., a few years): Focus is on business cycle fluctuations and changes in aggregate demand, which often drive them. Stabilization policies like monetary policy or fiscal policy are relevant in this time frame the medium run (e.g., a decade): Over the medium run, the economy tends to an output level determined by supply factors like the capital stock, the technology level, and the labor force, and unemployment tends to revert to its structural (or "natural") level. These factors move slowly, so that it is a reasonable approximation to take them as given on a medium-term time scale, though labour market policies and competition policy are instruments that may influence the economy's structures and hence also the medium-run equilibrium the long run (e.g., a couple of decades or more): On this time scale, emphasis is on the determinants of long-run economic growth like accumulation of human and physical capital, technological innovations, and demographic changes. Potential policies to influence these developments include education reform, incentives to change saving rates, or incentives to increase R&D activities.
Output and income National output is the total amount of everything a country produces in a given period of time. Everything that is produced and sold generates an equal amount of income. The total net output of the economy is usually measured as GDP. Adding net factor incomes from abroad to GDP produces gross national income (GNI), which measures the total income of all residents in the economy. In most countries, the difference between GDP and GNI is modest so that GDP can be treated as the total income of all inhabitants as well; however, in some countries, e.g., those with very large net foreign assets (or debt), the difference may be considerable. Advances in technology, accumulation of machinery and other capital, and better education and human capital, are all factors that lead to increased economic output over time. However, output does not always increase consistently over time. Business cycles can cause short-term drops in output called recessions. Economists look for macroeconomic policies that prevent economies from slipping into either recessions or overheating and that lead to higher productivity levels and standards of living.
Unemployment
The amount of unemployment in an economy is measured by the unemployment rate, i.e., the percentage of persons in the labor force who do not have a job, but who are actively looking for one. People who are retired, pursuing education, or discouraged from seeking work due to a lack of job prospects are not part of the labor force and, consequently, are not counted as unemployed either. Unemployment has a short-run cyclical component which depends on the business cycle, and a more permanent structural component, which can be loosely thought of as the average unemployment rate in an economy over extended periods, and which is often termed the natural or structural rate of unemployment. Cyclical unemployment occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and short-run GDP growth. The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment. The structural or natural rate of unemployment is the level of unemployment that will occur in a medium-run equilibrium, i.e., a situation with a cyclical unemployment rate of zero. There may be several reasons why there is some positive unemployment level even in a cyclically neutral situation, which all have their foundation in some market failure:
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