Macroeconomics is perhaps one of the most challenging topics to study, and it is very complicated, especially for newcomers. Why is macroeconomics so complicated? And why are economic theories so divergent?
In this article we will look at some of the reasons that make macroeconomics so complicated, and how you navigate through it.
Why is macroeconomics is difficult?
Macroeconomics is difficult because it involves a lot of moving parts. While microeconomics is fairly easy to study, and it relies on straightforward concepts, macroeconomics tries to study the entire economy which is much more difficult to grasp. Additionally, the goal of macroeconomics is to try to explain economic events and forecast economic indicators.
Since there are so many diverging theories that try to explain the behavior of the economy it is an extremely complex topic. When even the academics do not agree entirely on it, it showcases how difficult for someone studying the topic to actually understand it.
Here are some of the reasons why macroeconomics is so difficult:
- There are a lot of moving parts influencing macroeconomics
- Macroeconomic theories tend to diverge
Macroeconomics moving parts analogy
Ray Dalio has the best analogy to explain how macroeconomics works, and how all of its moving parts work together. An economy is a machine that relies on millions if not billions of gears, that represent every transaction and every person or entity that participates in the economy.
What makes macroeconomics so complex is that it tries to understand how millions or billions of small moving parts all work together, and the effect it has on the broader economy.
Diverging macroeconomic theories
Another reason why macroeconomics is so difficult to understand and to study is that most of the modern theories have disagreeing opinions. This makes it difficult to follow a single theory that could explain how the economy is performing and should perform in the future. Here are the main macroeconomic theories:
Keynes became a prominent economist during the 1930s Great Depression. During this complicated economic period, Keynes advocated that government should increase its spending while reducing taxes. This increase in spending would generate higher aggregate demand.
Keynesian economics argues that government fiscal policies and central bank monetary policies should be used in order to control aggregate demand. This allows the government to stimulate the economy during hard times, and improve the economic conditions of the country. By stimulating the economy, and reducing taxes, consumers are more incentivized to consume. In the same way, business owners will need to hire more people, which leads to lower unemployment.
Austrian economics has its roots in Austria in the late 19th century. It is centered around the utility of products and services. It diverges from older economic theories because it determines that the price of a product or service is determined by the consumer's preferences (marginal utility) and choices as opposed to the production cost (cost-of-production theories). Austrian economics advocates for a free market without any government or central bank intervention.
Monetarism (Chicago economics)
Monetarism has been the key focus of Milton Friedman, one of the most renowned economists, This economic theory is based on the importance of money supply, and the importance and influence Central Banks can have on the economy.
It became an acclaimed macroeconomic theory during the 1970s when inflation was rapidly rising. While many economists were trying to justify and understand the reasons why the inflation rate was so high, Monetarism tried to address the issue. By explaining that when Central Banks increase the money supply. Coincidentally we are currently experiencing a similar macroeconomic environment to the 1970s, and it shows that Monetarism is as relevant as it was back then.
What are the problems concerning macroeconomics?
Most of the problems macroeconomics tries to address are related to GDP growth, unemployment, inflation, and the health of the economy. The goal of macroeconomics is to study economic indicators. In order to estimate the future of the economy in order to have economic growth. Macroeconomics is also extremely useful for governments to choose or adopt fiscal and monetary policies. It is also extremely useful for businesses to make the best decisions, and it ultimately helps consumers.
Is macroeconomics difficult to learn?
Since macroeconomics relies on understanding the complete economy, it is one of the most difficult subjects to learn. Highlighting the difficulty of macroeconomics is the number of diverging theories, that try to explain how the economy should work in order to create the highest economic growth.
Importance of macroeconomics
Understanding macroeconomics is extremely important for business owners, governments, and everyday people. Macroeconomics affects our everyday lives, and it impacts our economic decisions. Therefore studying it, and understanding how it can relate to our life, and our work is crucial.
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