Economics is also divided into macroeconomics and microeconomics. (Micro and macro derive from Greek words for “large” and “small,” respectively.) Macroeconomics (the big picture) involves study of the entire society— sums of sets of micro variables (e.g., numbers of workers employed by various firms) yield aggregate (macro) variables (e.g., national employment). Microeconomics focuses on the detailed behavior of specific households, firms, or industries. By analogy, microeconomic tools are microscopes, while macroeconomic tools are telescopes.
Macro and micro differ more by degree than kind. In a sense, macro involves the study of the forest while micro focuses on individual trees. Thus, macroeconomics considers how national income, unemployment, inflation, and economic growth are determined.
Macroeconomics focuses on aggregate variables relevant for an entire national economy, or even the world economy.
The growing influence of international trade and finance on economies everywhere is increasingly incorporated into modern macroeconomic models. Macro policy addresses the total effects of changing taxes and government spending, or growth in the money supply.
Commonly agreed-upon normative goals of macro policy include:
High employment. People suffer when many workers cannot find jobs and many manufacturing plants and much machinery sit idle.
Price-level stability. If average prices are volatile, people may be uncertain about how much their wages will buy, or whether to consume now or invest in hopes of future returns.
Economic growth. People want higher incomes each year and most hope their children will be even more prosperous than they are.
Economic security is closely related to achieving these three goals. People want to retain their jobs and the good things they have.
Security may be threatened by such events as nuclear war or by changes in what society wants. The birth of the auto put buggy-whip braiders out of work and recently, powerful PCs devastated the markets for both typewriters and mainframe computing (e.g., IBM was dependent on mainframes and got into deep trouble. And how many people today even own a typewriter?)
We mentioned earlier that nominal (monetary) prices significantly affect behavior only when translated into relative prices. Thus, for example, inflation (a hike in average monetary prices) is a problem only if it distorts relative prices or redistributes income. But inflation always disrupts both, and it can stunt economic growth as well, so it is a major concern for macro policymakers.