Text 8. MACROECONOMICS VERSUS MICROECONOMICS

Economists derive and apply principles about economic behaviour at two levels.

Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates such as the government, household, and business sectors. An aggregate is a collection of specific economic units treated as if they were one unit. Therefore, we might lump together the millions of consumers in any economy and treat them as if they were one huge unit called «consumers».

In using aggregates, macroeconomics seeks to obtain an overview, or general outline, of the structure of the economy and the relationships of its major aggregates. Macroeconomics speaks of such economic measures as total output, total employment, total income, aggregate expenditures, and the general level of prices in analyzing various economic problems. No or very little attention is given to specific units making up the various aggregates. Macroeconomics examines the forest, not the trees.

Microeconomics looks at specific economic units. At this level of analysis, the economist observes the details of an economic unit, or very small segment of the economy, under the figurative microscope. In microeconomics we talk of an individual industry, firm, or household. We measure the price of a specific product, the number of workers employed by a single firm, the revenue or income of a particular firm or household, or the expenditures of a specific firm, government entity, or family. In microeconomics, we examine the trees, not the forest.

The macro-micro distinction does not mean that economics is so highly compartmentalized that every topic can be readily labeled as either macro or micro; many topics and subdivisions of economics are rooted in both. Example: While the problem of unemployment is usually treated as a macroeconomic topic (because unemployment relates to aggregate spending), economists recognize that the decisions made by individual workers in searching for jobs and the way specific product and labour markets operate are also critical in determining the unemployment rate.

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