What Is Macroeconomics?

What is Macroeconomics, and how is the study of this Economic science important to us?

To answer the question "what is Macro Economics", it is necessary to first look at why it is necessary for Economists to study MacroEconomics.

It all started on 23 October 1929 - this was the day that Wall Street (the New York Stock Exchange) crashed and almost crippled the economy of the United States of America and the rest of the world.

Successful businessmen found that they had lost everything, wealthy families became paupers overnight and many chose to end their lives rather than to face the devastation that this financial catastrophe had wrought in their lives.

Some people hoped that somehow a miracle would come about and restore wealth that had been lost, but when the Vienna Kreditastalt declared bankruptcy on 14 May 1931, it was all too clear that the years ahead would be the most financially difficult that the world would have to endure.

Before the Wall Street Crash, just over 3% of the work force of Americans were unemployed and by 1933, a mere four years after the Wall Street Crash, a quarter of America's labour force were unemployed!

The rest of the world reeled in shock as well, but the Wall Street Crash did not have as big an impact on the other countries as it did have on the United States of America. The United Kingdom had already experienced problems with unemployment during the mid-1920s.

The high unemployment figure resulted in lowered prices for goods because the demand for goods decreased as people simply did not have money to spend on these goods. The agriculture industry and the suppliers of the country's most basic consumer items were hard-hit. The decade of the nineteen-thirties heralded in what has been termed "The Great Depression". People were poverty-stricken and life was a daily, uphill battle just to survive.

There was one country, though, that appeared to be financially strong: Germany. Germany had lost the First World War (1914 - 1918) and the cost of this war had been great - powerful German industries and empires crumbled and many said that Germany would never recover from this. Yet, between 1933 and 1939, Germany was one of the most economically powerful nations on earth. It took them less than twenty years to rebuild a nation - Germany was stronger economically than it had ever been before.

What was the difference, economists found themselves asking? What did the Germans do right? What was the rest of the World missing? Where did America go wrong? If Germany could rebuild itself, surely the rest of the World could do so too?



This is how the study of MacroEconomics started. The questions were asked regarding Germany and the rest of the world, and the answers were carefully analysed.

So how did the Germans manage to claw their way back from poverty levels to being one of the most economically powerful nations in the world, in the years between 1933 and 1939? Quite simply - to rebuild their fallen nation, Germany worked hard and at a continuous pace to restore their industries. This increased the total production of the country as a whole, which resulted in very low unemployment figures and the nation was able to spend more money on all products and services produced in this country, which again led to an increased output of production.

Economists came to a shocking conclusion"¦.The Great Depression need never have happened if a proper study had been done of the world's global economic situation - the warning signs would have enabled governments to implement plans to prevent the tragedy of the Wall Street Crash in 1929.

Economists in the past studied only the interaction of the production and prices of separate goods and services, and the role individual consumers and manufacturers had in determining the availability of these goods. Today, this is known as the study of MicroEconomics. It is important to study Micro Economics, but without understanding the bigger picture (macro picture) of a country's economics, it would be impossible to be prepared in times of financial crisis.

Following are the main issues that are part of the study of MacroEconomics:

GDP (Gross Domestic Product):

How often does the term Gross Domestic Product of a country get bandied about? One reads about it in the financial sections of newspapers. The GDP of a country is simply the average amount of products (or goods) and services manufactured and/or produced in a country. The higher the GDP of a country, the more financially powerful is that country.

Unemployment

There is no reason why there should be a high unemployment rate if the GDP of a country is high. If a country has huge unemployment figures, then plans should be implemented to increase the GDP of the country. High unemployment figures point to a low GDP. During The Great Depression, a low GDP resulted in a never-to-be-recovered loss in production of goods and services, and time was lost, time that could have been used to build buildings, furniture, roads, bridges.

Inflation

Inflation is when there is an overall and steady increase of the prices on goods and services of a country. Inflation that increases too suddenly, can also affect the GDP - the higher the rate of inflation, the less the money available to spend on goods and services and this can in turn decreases the overall productivity of a country. MICRO Economics plays an important part in the study of inflation - for example: when gas (petrol) prices increases steadily, then ultimately it results to increased prices of all goods and services - the individual study of the petrol price pertains to Micro Economics, but the effect it has on the country's inflation rate is studied in Macro Economics.

Combined Inflation and Unemployment

After the Second World War, the world and especially America experienced a time of wealth and low unemployment figure... until the nineteen-seventies when the study of MacroEconomics revealed the potentially disasterous effects that a combined high inflation and high unemployment rate could have on a country's economy and production.

The study of MacroEconomics and implementation of plans to build up the economy of a country has ensured that the United States of America is one of the strongest (financially) countries in the world.

Most of the nations in Africa and parts of South America are struggling, more so than the USA did during The Great Depression years. In these countries, poverty is rife, health and education are issues that are not addressed urgently enough and their governments spend far too much money lining their cabinet minister's coffers. These countries need sound economic policies, which can be determined by means of a careful study of MacroEconomics issues in each of these countries.

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