Macroeconomics: History, Definition, Focus of Discussion

Modern economic studies begin with a study of microeconomics . Then in its development, the study of microeconomics is considered insufficient to answer various economic problems, especially at a broader level. This is what demands new scientific studies outside of microeconomics, or what is commonly called macroeconomics.

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Macroeconomic History

After the popular microeconomics, history again gave rise to the urgency of the study of new science in the form of macroeconomics. This macroeconomic theory was triggered by the Great Depression that first occurred in the United States. The Great Depression (1929-1933) caused the economies of various large countries to experience major problems. A series of economic problems occur such as rising unemployment, a dramatically reduced economic output, and a sharp decline in investment.

The economic downturn hit large countries because of the implementation of economic liberalization. This long-running depression also shattered world confidence in the classical economic hypothesis that invisible hands would act automatically to balance the market. In fact, this classical economic assumption is not proven.

Following this event, the Keynes revolution emerged marked by the publication of a book entitled “The General Theory of Employment, Interest and Money” in 1936, the work of the British economist, John Maynard Keynes. In his book, Keynes expressed his opinion to improve the state of economic depression that took place in many countries of the world.

General Theory expressed by Keynes consists of two main points, namely:

  1. a critique of the weaknesses of idealistic (utopian) Classical Theory regarding market assumptions, and the overemphasis of the economic problem on the supply side.
  2. proposals for economic recovery by including the Government’s role in the economy as a step to stimulate the demand side.

These two points of Keynes’s mind then brought radical reforms in economics. The renewal of economics includes:

  1. Start attention to the global dimension or AGGREGATE (MACRO) in the analysis of economics. This is what triggers the development of economics into Macroeconomics.
  2. The inclusion of the role of government in the analysis of economics so that this has led to assumptions about the importance of the role of policy analysts ( Policies Analysis).
  3. Required policy analysis, it is also necessary related empirical studies, in this case is related to macroeconomic policy studies.

From this history, Keynes came to be known as the “Father” of Macroeconomics as well as the pioneering economist of inductive studies. Because, the rationale for economic analysis is refined not only in deductive analysis, but also in inductive analysis.

Understanding Macroeconomics

Understanding macroeconomics is economics which in its approach to economic quantities uses aggregate quantities as a whole or in aggregate. Macroeconomic theory can also be called an analysis of national income or national income theory because the focus of the study is within the scope of the state.

Reasons for the Importance of Macroeconomic Studies

In addition, the beginning of the development of Macroeconomics is also driven by a number of economic conditions that cannot be explained using microeconomic analysis. As for things like:

  1. the factors that determine the level of a country’s economic activity;
  2. the reasons for unemployment problems in each country;
  3. the reasons for rising prices often followed by serious unemployment problems;
  4. the reason for the economic slowdown in a country.

Focus of Macroeconomic Discussion

There are still a number of issues that cannot be answered using microeconomic studies. That is why it is necessary to improve economics with macroeconomic studies. The focus of discussion of Macroeconomics includes:

  1. The process of determining the level of activity in the economy in terms of demandand supply ;
  2. The main problems that are often faced in every economy
  3. The role of policyand government interference in efforts to overcome the economic problems facing the country;
  4. The behavior of economic agents in the context of aggregates (overall).

In this macroeconomic study, much will be discussed about the role of government or the state in economic matters. Therefore, in this macroeconomic it will also discuss fiscal policy and monetary policy as part of the focus of his study.

Micro and Macroeconomics Similarities

The purpose of the study in this branch of macroeconomics is basically the same as microeconomics, which is to see whether there has been an efficient allocation of economic resources.

Then, if the answer is not yet, it will be examined further on what causes it and how to overcome it. Whereas if it has been done, what has been studied is whether the efficiency can be increased again or not.

Government in Macro Economy

In macroeconomic governance, the government holds primary control. The functions of government in macroeconomic governance include:

  1. The function of stabilization, namely in the effort to create economic, social, political, legal, defense and security stability.
  2. The allocation function, namely in the context of providing public goods and services, for example construction of highways, provision of lighting facilities, school buildings, and other infrastructure.
  3. Distribution function, namely in an effort to realize equity or distribution of community income.

More specifically, there are several roles of government in macroeconomics, which include:

(1) Fiscal Policy

In fiscal policy, the government can change state revenues and expenditures in order to achieve economic stability, expand employment opportunities, and increase economic growth. For a more complete explanation, please read the fiscal policy article .

(2) Monetary Policy

In monetary policy, the government can use Central Bank to increase or decrease the amount of money circulating in the market with the aim of controlling the economy. For more information, please read the article on monetary policy .

(3) Non-fiscal and non-monetary policies

Macro policies implemented by the government may not be classified as fiscal or monetary, such as those consisting of: (a) controlling demands for increased income of workers; (b) encouragement of entrepreneurs in improving production efficiency; (c) infrastructure management, (d) making conducive regulations.

(4) Budget Policy

In budget policies, the government can take a role in terms of the possibility of creating new money as well as options for procuring loans.

(5) International Financial Policy

The government takes a special role in the framework of international financial policy, such as by: (a) providing subsidies to certain industries in the context of protectionism, lowering, or suppressing sales prices; (b) supervision of export-import activities and regulation of goods to achieve stable goods; (c) procurement of commodity approvals; (d) opening of private foreign investment; (e) implementation of government foreign investment. These policies are basically carried out with the aim of promoting and protecting the domestic economy.

(6) Trade Policy

Trade policies implemented by the government can be carried out to improve and perfect the trading system, in order to realize national economic goals, such as: increasing producer income; and smooth the flow of goods and services that benefit consumers.

(7) Debureaucracy Simplification Policy

In this case, the government has an important role to simplify the bureaucracy, especially in terms of trade and to be able to determine the products of the agricultural, mining and other industries. The aim is to increase exports, reduce imports and encourage new investment.

(8) Deregulation Policy

Through the deregulation policy, the government can try to reduce regulations that can hinder the improvement of the national economy, with the aim of reducing high economic costs and reducing production costs.

Differences in Micro and Macro Economics

There are some fundamental differences that can be used to distinguish microeconomics and macroeconomics. Here are some of the differences:

# Narrow Broad Discussion

Fundamentally the difference between microeconomics and macroeconomics lies in the breadth of discussion of each study. Microeconomics discusses economic studies at a narrow level, while macroeconomics discusses economic studies at a broad level.

For example, if we talk about a company, its problems and how it competes with other companies, it means we are talking about the concept of microeconomics. Meanwhile, if we talk about how much foreign investment has entered Indonesia in one year and how this investment is managed, it means we are talking about the concept of macroeconomics.

If analogous, we can liken a forest and its trees. The country and its economy are forests with these trees. If we learn about the trees, the level of fertility, the fruits that are produced, the conditions, it is like studying micro matters. Meanwhile, if we learn about the forest, the fertility of the soil, the rainfall of the forest, it means that we are studying macro matters.

# The substance of the discussion

The second difference lies in the substance of the discussion. When viewed from the substance of the discussion, the micro and macro economics together discuss about how humans as rational individuals try to overcome the problem of scarcity (Scarcity).

It’s just that, in macroeconomics this human effort is focused on broad analysis from the point of government of a country. Whereas in microeconomics, the focus of analysis used is on individual behavior such as; companies (producers), labor and consumers, which are limited in a narrower context, such as industry.

# Employment Opportunity

Microeconomic theory assumes that when all productive resources are working or fully employed , it means that everyone can work so that no one is unemployed. Simply put, microeconomic theory departs from the basic assumption that the economy is already in a state of full employment .

In contrast to macroeconomic theory, the basic assumption is that an economy is not always in a state of full employment . It is still possible to have unemployment ( unemployment ), so to overcome this the government needs to act (Ahman & Rohmana, 2009: 19).

# Sale of goods

Microeconomic theory assumes that all goods produced by companies must be sold out. So, how many items are made, people will definitely buy them out. There are no unsold items. This makes the entrepreneur always in a position of balance ( equilibrium ) and always manages to achieve the maximum profit from his business.

Conversely, macroeconomic theory sees that the possibility of overproduction always exists. So, not every company’s production is bought by buyers. This makes the company not always successful in enjoying the maximum profit of its business because there is a risk of selling goods that are not full (Ahman & Rohmana, 2009: 19).

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