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Encyclopedia > Macroeconomics
Circulation in macroeconomics
Circulation in macroeconomics

Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole.[1] Along with microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indixes to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets. Image File history File links Circulation_in_macroeconomics. ... Image File history File links Circulation_in_macroeconomics. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... GDP is an acronym which can stand for more than one thing: (in economics) an abbreviation for Gross Domestic Product. ... This article does not cite its references or sources. ... Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. ... It has been suggested that this article or section be merged with consumption (economics). ... CIA figures for world unemployment rates, 2006 Unemployment is the state in which a person is without work, available to work, and is currently seeking work. ... In common usage, saving generally means putting money aside, for example, by putting money in the bank or investing in a pension plan. ... Invest redirects here. ... International trade is the exchange of goods and services across international boundaries or territories. ... International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. ... Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ... Firm can have several meanings: Firm - a loose legal term for a company. ... For people whose family name is Price see Price (disambiguation). ...


While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). In Economics, short-run refers to the decision-making time frame of a firm in which at least one factor of production is fixed. ... The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. ... In economic models, the long run time frame assumes no fixed factors of production. ... World GDP/capita changed very little for most of human history before the industrial revolution. ...


Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy. A model in macroeconomics is designed to simulate the operation of a national or international economy in terms of factors including the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices. ... Not to be confused with Political economy. ...

Contents

Development of macroeconomic theory

The first published use of the term "macroeconomics" was by the Norwegian Economist Ragnar Frisch in 1933[2] and before this, there already was an effort to understand many of the broad elements of the field. Ragnar Anton Kittil Frisch (March 3, 1895 - January 31, 1973) was a Norwegian economist. ...


Classical economics and the quantity theory of money

Until the early twentieth century, the quantity theory of money dominated as the favored macroeconomic model among classical economists.[3] This theory gives the equation of exchange: In economics, the velocity of money refers to a key term in the quantity theory of money, which centers on the equation of exchange: where is the total amount of money in circulation in an economy at any one time (say, on average during a month). ... In economics, the velocity of money refers to a key term in the quantity theory of money, which centers on the equation of exchange: where is the total amount of money in circulation in an economy at any one time (say, on average during a month). ... Classical economics is widely regarded as the first modern school of economic thought. ... In economics, the equation of exchange is MV = PQ where M is the quantity of money, V is the Velocity of money (how fast it is changing hands), P is the price level, and Q is the quantity or GDP. Categories: | ...

Mcdot V = Pcdot Q

The equation states that the money supply times the velocity of money (how quickly cash is passed from one person to another through a series of transactions) is equivalent to nominal output (price level times quantity of goods and services produced). Classical economists, such as Irving Fisher assumed that real income and the velocity of money would be static in the short-run, so, based on this theory, a change in price level could only be brought about by a change in money supply.[4] The classical quantity theory of money assumed that the demand for money was static and independent of other factors such as interest rates. Economists questioned the classical quantity theory of money during the Great Depression when the demand for money, and thus the velocity of money, fell sharply.[5] Irving Fisher, 1927. ... An interest rate is the rental price of money. ... For other uses, see The Great Depression (disambiguation). ...


Keynesianism

Until the 1930s, most economic analysis did not separate out individual behavior from aggregate behavior. With the Great Depression of the 1930s and the development of the concept of national income and product statistics, the field of macroeconomics began to expand. Before that time, comprehensive national accounts, as we know them today, did not exist. The ideas of the British economist John Maynard Keynes, who worked on explaining the Great Depression, were particularly influential. The 1930s were described as an abrupt shift to more radical and conservative lifestyles, as countries were struggling to find a solution to the Great Depression, also known as the [[. In East Asia, the rise of militarism occurred. ... For other uses, see The Great Depression (disambiguation). ... Keynes redirects here. ...


After Keynes

One of the challenges of economics has been a struggle to reconcile macroeconomic and microeconomic models. Starting in the 1950s, macroeconomists developed micro-based models of macroeconomic behavior, such as the consumption function. Dutch economist Jan Tinbergen developed the first national macroeconomic model, which he first built for the Netherlands and later applied to the United States and the United Kingdom after World War II. The first global macroeconomic model, Wharton Econometric Forecasting Associates LINK project, was initiated by Lawrence Klein and was mentioned in his citation for the Nobel Memorial Prize in Economics in 1980. Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ... In economics, the consumption fuction calculates the amount of total consumption in an economy. ... Motto: Je Maintiendrai (Dutch: Ik zal handhaven, English: I Shall Uphold) Anthem: Wilhelmus van Nassouwe Capital Amsterdam1 Largest city Amsterdam Official language(s) Dutch2 Government Parliamentary democracy Constitutional monarchy  - Queen Beatrix  - Prime minister Jan Peter Balkenende Independence Eighty Years War   - Declared July 26, 1581   - Recognised January 30, 1648 (by Spain... Alan Greenspan, former chairman, United States Federal Reserve. ... Jan Tinbergen Jan Tinbergen (The Hague, April 12, 1903 – June 9, 1994 The Hague), Dutch economist, was awarded the first Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1969, which he shared with Ragnar Frisch for having developed and applied dynamic models for the analysis... A model in macroeconomics is designed to simulate the operation of a national or international economy in terms of factors including the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices. ... Combatants Allied powers: China France Great Britain Soviet Union United States and others Axis powers: Germany Italy Japan and others Commanders Chiang Kai-shek Charles de Gaulle Winston Churchill Joseph Stalin Franklin Roosevelt Adolf Hitler Benito Mussolini Hideki Tōjō Casualties Military dead: 17,000,000 Civilian dead: 33,000... Wharton Economic Forecasting Associates (WEFA) was a world-leading Economics forecasting and consulting organisation founded by Nobel Prize winner Lawrence Klein. ... Look up link in Wiktionary, the free dictionary. ... Lawrence Robert Klein (born September 14, 1920) is an American economist. ... The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (in Swedish Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is a prize awarded each year for outstanding intellectual contributions in the field of economics. ... Year 1980 (MCMLXXX) was a leap year starting on Tuesday (link displays the 1980 Gregorian calendar). ...


Theorists such as Robert Lucas Jr suggested (in the 1970s) that at least some traditional Keynesian (after John Maynard Keynes) macroeconomic models were questionable as they were not derived from assumptions about individual behavior, but instead based on observed past correlations between macroeconomic variables. However, New Keynesian macroeconomics has generally presented microeconomic models to shore up their macroeconomic theorizing, and some Keynesians have contested the idea that microeconomic foundations are essential, if the model is analytically useful. An analogy might be, that the fact that quantum physics is not fully consistent with relativity theory does not mean that relativity is false. Robert Emerson Lucas, Jr. ... Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. ... The Lucas Critique, named for Robert Lucass work on macroeconomic policymaking, says that its naive to try to predict the effect of a policy experiment based purely on correlations in historical data, especially high-level aggregated historical data. ... New Keynesian economics developed partly in response to new classical economics. ...


The various schools of thought are not always in direct competition with one another, even though they sometimes reach differing conclusions. Macroeconomics is an ever evolving area of research. The goal of economic research is not to be "right," but rather to be useful (Friedman, M. 1953). An economic model, according to Friedman, should accurately reproduce observations beyond the data used to calibrate or fit the model.


Analytical approaches

The traditional distinction is between two different approaches to economics: Keynesian economics, focusing on demand; and supply-side economics, focusing on supply. Neither view is typically endorsed to the complete exclusion of the other, but most schools do tend clearly to emphasize one or the other as a theoretical foundation.

  • Keynesian economics The first stage of macroeconomics was a period of academic theory heavily influenced by the economist Keynes. It therefore has his name. This period focused on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies.
  • Neoclassical economics For decades there existed a split between the Keynesians and classical economists, the former studying macroeconomics and the latter studying microeconomics. This schism has been resolved since the late 80s, however, and macroeconomics has evolved well into its second phase. The models Keynes used are now considered to be outdated, and new models have been designed that have greater logical consistency and are more closely related to microeconomics. The models used in macroeconomics today, however, have been built upon Keynesian models and are therefore similar. The main difference in this second stage of macroeconomics is an increased focus on monetary policy, such as interest rates and money supply. Macroeconomic theory today has harmonized the study of aggregate demand and supply with the study of money.

Keynesian economics (pronounced kainzian, IPA ), also called Keynesianism, or Keynesian Theory, is an economic theory based on the ideas of the 20th-century British economist John Maynard Keynes. ... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... In economics, incomes policies are wage and price controls used to fight inflation. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...

Schools

  • Monetarism, led by Milton Friedman, holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time.
  • New classical economics. The original theoretical impetus was the charge that Keynesian economics lacks microeconomic foundations -- i.e. its assertions are not founded in basic economic theory. This school emerged during the 1970s. This school asserts that it does not make sense to claim that the economy at any time might be "out-of-equilibrium". Fluctuations in aggregate variables follow from the individuals in the society continuously re-optimizing as new information on the state of the world is revealed. A neo classical economist would define macroeconomics as dynamic stochastic general equilibrium theory, which means that choices are made optimally considering time, uncertainty and all markets clearing.
  • New Keynesian economics, which developed partly in response to new classical economics, strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.
  • Post-Keynesian economics represents a dissent from mainstream Keynesian economics, emphasizing the role of uncertainty, liquidity preference and the historical process in macroeconomics.

Monetarism is a set of views concerning the determination of national income and monetary economics. ... Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ... This page is on the topic of price inflation in economics. ... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... In economics, crowding out theoretically occurs when the government expands its borrowing to finance increased expenditure, or cuts taxes (i. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... New Classical Economics emerged as a school in Macroeconomics during the 1970s. ... Dynamic stochastic general equilibrium modeling (abbreviated DSGE or sometimes DGE) is a branch of applied general equilibrium theory that is increasingly influential in contemporary macroeconomics. ... New Keynesian economics developed partly in response to new classical economics. ... Post-Keynesian economics is a school of thought which is based on the ideas of John Maynard Keynes. ... “Uncertain” redirects here. ... Keynes developed the Liquidity Preference of Interest in The General Theory. ...

Macroeconomic Policies

In order to try to avoid major economic shocks, such as The Great Depression, governments make adjustments through policy changes which they hope will succeed in stabilizing the economy. Governments believe that the success of these adjustments is necessary to maintain stability and continue growth. This economic management is achieved through two types of strategies.

Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank...

Notes

  1. ^ Blaug, Mark (1985). Economic theory in retrospect. Cambridge, UK: Cambridge University Press. ISBN 0-521-31644-8. 
  2. ^ Frisch, Ragnar (1933). Propagation Problems and Impulse Problems in Dynamic Economics. London: Allen & Unwin. 
  3. ^ Mishkin, Frederic S. (2004). The Economics of Money, Banking, and Financial Markets. Boston: Addison-Wesley, 517. 
  4. ^ Mishkin 2004, pp. 518–19
  5. ^ Mishkin 2004, p. 521

This article is about the city in England. ... The headquarters of the Cambridge University Press, in Trumpington Street, Cambridge. ... This article is about the capital of England and the United Kingdom. ... Allen & Unwin, formerly a major British publishing house, is now an independent, Australia-based book publisher and distributor. ... Nickname: City on the Hill, Beantown, The Hub (of the Universe)1, Athens of America, The Cradle of Revolution, Puritan City, Americas Walking City Location in Massachusetts, USA Counties Suffolk County Mayor Thomas M. Menino(D) Area    - City 232. ... Pearson can mean Pearson PLC the media conglomerate. ...

References

  • Blanchard, Olivier (2000), Macroeconomics, Prentice Hall, ISBN 013013306X .
  • Friedman, Milton (1953), Essays in Positive Economics, London: University of Chicago Press, ISBN 0-226-26403-3 .
  • Heijdra, B. J. (2002), Foundations of Modern Macroeconomics, Oxford University Press, ISBN 0-19-877617-9 .
  • Mishkin, Frederic S. (2004), The Economics of Money, Banking, and Financial Markets, Boston: Addison-Wesley, p. 517 
  • Snowdon, Brian (2005), Modern Macroeconomics: Its Origins, Development And Current State, Edward Elgar Publishing, ISBN 1-84376-394-X .

Pearson can mean Pearson PLC the media conglomerate. ... Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ... This article is about the capital of England and the United Kingdom. ... The University of Chicago Press is the largest university press in the U.S. It is operated by the University of Chicago and publishes a wide variety of academic titles, including The Chicago Manual of Style, dozens of academic journals including Critical Inquiry, and a wide array of texts covering... Oxford University Press (OUP) is a highly-respected publishing house and a department of the University of Oxford in England. ... Nickname: City on the Hill, Beantown, The Hub (of the Universe)1, Athens of America, The Cradle of Revolution, Puritan City, Americas Walking City Location in Massachusetts, USA Counties Suffolk County Mayor Thomas M. Menino(D) Area    - City 232. ... Pearson can mean Pearson PLC the media conglomerate. ...

See also


  Results from FactBites:
 
CLEP: Principles of Macroeconomics (557 words)
The Principles of Macroeconomics examination covers material that is usually taught in a one-semester undergraduate course in introductory macroeconomics.
Most textbooks used in college-level introductory macroeconomics courses cover the topics in the outline given earlier, but the approaches to certain topics and the emphasis given to them may differ.
To prepare for the Principles of Macroeconomics exam, it is advisable to study one or more college textbooks, which can be found in most college bookstores.
New Classical Macroeconomics, by Robert King: The Concise Encyclopedia of Economics: Library of Economics and Liberty (2646 words)
Macroeconomic quantities like GDP are the result of the general equilibrium of the markets in an economy.
Macroeconomics has lagged behind because Keynesian macroeconomics was dominant when these principles were systematically applied in these other fields in the forties through the sixties.
In contrast to classical macroeconomics, new and old, Keynesian macroeconomics did not begin with the assumption that an economy is made up of individually rational economic suppliers and demanders.
  More results at FactBites »

 
 

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