Distinguish between macro-economics and micro-economics. Explain their relative
merits and defects.
Answers
Microeconomics studies individuals and business decisions, while macroeconomics analyzes the decisions made by countries and governments. Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
Answer:
Microeconomics vs. Macroeconomics:
Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
Though these two branches of economics appear different, they are actually interdependent and complement one another. Many overlapping issues exist between the two fields.
Explanation:
Microeconomics
Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services. It considers taxes, regulations and government legislation.
Microeconomics focuses on supply and demand and other forces that determine price levels in the economy. It takes a bottom-up approach to analyzing the economy. In other words, microeconomics tries to understand human choices, decisions and the allocation of resources.
Having said that, microeconomics does not try to answer or explain what forces should take place in a market. Rather, it tries to explain what happens when there are changes in certain conditions.
For example, microeconomics examines how a company could maximize its production and capacity so that it could lower prices and better compete. A lot of microeconomic information can be gleaned from company financial statements.
Macroeconomics
Macroeconomics, on the other hand, studies the behavior of a country and how its policies impact the economy as a whole. It analyzes entire industries and economies, rather than individuals or specific companies, which is why it's a top-down approach. It tries to answer questions such as, "What should the rate of inflation be?" or "What stimulates economic growth?"
Macroeconomics examines economy-wide phenomena such as gross domestic product (GDP) and how it is affected by changes in unemployment, national income, rates of growth and price levels.
Macroeconomics analyzes how an increase or decrease in net exports impacts a nation's capital account, or how gross domestic product (GDP) is impacted by the unemployment rate.
Macroeconomics focuses on aggregates and econometric correlations, which is why governments and their agencies rely on macroeconomics to formulate economic and fiscal policy. Investors who buy interest-rate sensitive securities should keep a close eye on monetary and fiscal policy. Outside a few meaningful and measurable impacts, macroeconomics doesn't offer much for specific investments.
John Maynard Keynes is often credited as the founder of macroeconomics, as he initiated the use of monetary aggregates to study broad phenomena. Some economists dispute his theories, while many Keynesians disagree on how to interpret his work.