A primer from Prof. Jarrell on this important subject
Macroeconomics is the study of aggregate supply and demand, and looks both internally to the workings of the economy and externally to how a domestic economy interacts with others worldwide.
Macro builds on the principles of microeconomics, which is the study of prices and quantities of individual goods and the markets where these goods are produced and sold.
In macro, “price” refers to some index of the prices of domestic goods and services, and “quantity” refers to some measure of the value of domestic production or “output.” One common measure of output is gross domestic product (“a measure of the productive activity of a country computed on the basis of the ownership of the factors of production”). A country’s standard of living is usually directly correlated with its real output, or the value of total output corrected for inflation.
Unlike microeconomics, macroeconomics started with the idea that prices and markets do not continuously resolve all of the coordination requirements of a modern economy. Such “failures of coordination” (Keynes) seem likely when one views the economy as the collective sum of thousands of microeconomic markets.
For example, although most economies around the world have experienced generally positive trends in their gross domestic product, short run positive and negative deviations (recessions and, in more dramatic examples of the failure of coordination, depressions) around the trend line, or “business cycles,” are common.
Inflation is the rate of change of the average level of prices, where the price level is usually measured as a price index. Inflation rates are typically quoted in annualized percentages. In normal times, the inflation rate is procyclical: it rises in periods of high growth and declines in periods of slow growth. Unemployment, by contrast, is usually countercyclical. The U. S. inflation rate was as likely to be negative as it was positive before World War II; since then, price levels have risen fairly consistently.
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