Understanding macroeconomics definition (plus factors)

By Indeed Editorial Team

Published 18 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Macroeconomics is the study of large-scale economic activity and the factors that influence it. Studying this discipline can drive things like strategic business decisions, government spending and even policymaking. Understanding this concept and how it relates to microeconomics can be beneficial if you wish to pursue a career in finance. In this article, we provide the macroeconomics definition, explain how it differs from microeconomics, discuss the interplay between the two and describe examples of macroeconomic factors.

What is the macroeconomics definition?

The macroeconomics definition is that it's the study of large-scale economic factors and activity. The prefix macro means large, so the literal interpretation of the term could be large economics. Macroeconomic study can help you understand how certain stimuli may impact the overall economy. It can give you an understanding of economic performance, the factors driving it and the ways you may improve it. A macroeconomic perspective can demonstrate how factors like inflation, gross domestic product (GDP), price indices, large-scale supply and demand, international trade and unemployment can affect the economy and people.

Macroeconomic modelling can be a valuable tool for organisations, governments and policymakers. Looking at economic trends and attempting to predict the effect of certain factors can have great strategic value. Understanding and modelling the potential consequences of decisions can be beneficial to businesses and government bodies for informing decision making and creating policies. Macroeconomics as a discipline links the technologies, policies, materials and resources that drive economic activity and development.

Related: What is an economist and what does an economist do?

How do macroeconomics and microeconomics differ?

Macroeconomics and microeconomics relate to each other, but they look at economics from very different perspectives. Microeconomics examines the tendencies of individuals, the decisions they make and how these choices may change in response to economic factors like cost, availability of resources, supply chain, changes in production and incentives. Macroeconomics, instead, looks at the larger, overall effect of microeconomics. The factors in both disciplines can generally influence one another.

The individual that microeconomics studies can refer to people, households or industries. Macroeconomics looks at the entire performance, behaviour and structure of a complete economy that includes these. Studying economics from the macro perspective can give you an insight into how economies and businesses relate to elements like inflation, GDP and supply and demand. It can also show the influence these have on the economy's performance. This understanding can inform decisions and policy. Microeconomics, instead, can demonstrate the patterns of individual businesses, supply chains and consumer needs and indicate how these may change and respond to different factors.

Related: 17 types of economists (with job options and tips)

How do macroeconomics and microeconomics interact?

Microeconomics can contribute to and influence macroeconomics in several ways, including the following factors:

Supply and demand

One major factor that has a macroeconomic influence is supply and demand. Generally, when demand is high, the cost of a good or service increases. The supply and demand of individual industries or even specific businesses can have a macroeconomic effect. A natural event that affects communities or a societal shift or boycott can make consumers stop purchasing certain products. A sharp dip in spending on a wide scale can cause a decline in the economy.

Related: Supply and demand diagram (definition, types and examples)

Cost of production

Macroeconomics can also examine the cost of producing goods and services. The cost of getting supplies and raw materials, transporting and shipping, labour or other business overheads can all impact production costs. Higher production costs can increase the price that consumers pay. Eventually, costs may become prohibitive to consumers, who may stop making purchases. This can affect the wider economy.

Related: What are production costs? (With definition, types and tips)

Labour

Macroeconomics also deals with the cost of labour, which can be one of the largest business overheads. Businesses may wish to examine and understand labour costs and reconcile them with the costs of running a business to better make a profit. Conversely, the cost of labour links to wages, which relate to the buying power of the individual. Any relative contraction or stagnation of wages can impact the buying power of consumers, which can have macroeconomic consequences.

Related: Types of economic systems and what makes them different

Natural resources

Natural resources relate closely to production, as they're often an important part of the supply chain. Studying natural resources and the trends in their value can give businesses an understanding of their worth and the role they play in production. Any fluctuation in this worth can have knock-on effects on entire industries that rely on these resources and may affect the prices of goods and services. This can have significant macroeconomic effects, particularly when the change in the price of resources has consequences on the cost of living and buying power of consumers.

8 macroeconomic factors

Economists, analysts and other professionals dealing with the financial health of the economy typically study macroeconomic factors. These factors are the general indicators of the financial growth or decline that may affect the economy. Understanding them can help economic advisors guide policymakers and direct businesses, governments or global markets. Examples of these factors include:

1. Business cycles

The business cycle refers to predictable patterns of economic growth, recession and recovery. This cycle typically affects economic markets. In an economy, you may observe times of low unemployment and high rates of production, which transition to periods of high unemployment and low production rates. These periods can then turn back to economic growth as the economy recovers.

2. Economic growth

Economic growth refers to an increase in the overall production occurring in an economy. Macroeconomists typically look to understand the different factors that either promote or slow this growth. They can then respond to these factors by creating policies that support growth, economic development and an overall rise in living standards.

Related: What are fiscal policies? (Plus how they work and types)

3. Budget and government spending

Governments play a key role in macroeconomics. They can institute policies or schemes that aim to promote economic growth or curtail spending, which can affect the economy. The way governments choose to allocate funds can also impact the economy. For example, the extent to which they choose to invest in infrastructure can affect the supply chain, which in turn impacts production. Governments can also keep assets they may choose to reinvest into an economy. Moreover, the way they issue currencies may affect factors like inflation.

4. GDP

GDP is the overall value of all the goods and services an economy produces in a year. Understanding this figure typically lets macroeconomics assess an economy's health and profitability. Macroeconomists can also look at which goods and services perform well and evaluate how an economy's GDP affects the value of its currency. This can have an impact on the health of an economy from a global economic perspective.

Related: What is the real gross domestic product (GDP) formula?

5. Inflation

Inflation refers to how the general price level in an economy can increase or decrease, or how the overall value of currency can change. As inflation rises and falls, so does the value of the currency and the number of goods and services consumers can buy with it. Macroeconomists look to understand inflation and the forces behind it to gain insight into its causes and the effect it has on individuals, businesses and the actual currency in an economy. This can help them create models predicting inflation rates and assess how they may affect the health of an economy.

Related: How to calculate inflation rate and why it's useful

6. Interest rates

Interest rates determine the percentage borrowers repay on the amount they've borrowed. Changing interest rates can affect people's spending habits, which can influence the economy. Though lenders can set their own interest rates, the Bank of England sets a base rate of interest that influences them. This base rate may help manage inflation and keep the economy stable.

Related: Simple interest vs compound interest (with calculations)

7. Unemployment

Unemployment rates can have a large impact on the overall health of an economy. As unemployment rises, consumers have less money and become less willing to spend it. This typically causes a dip in the economy. Economists may study the causes of unemployment and the micro- and macroeconomic impacts it has. They may also look to devise strategies to help reduce large-scale unemployment, thus improving the health of the economy.

Related: What is frictional unemployment? (Causes and effects)

8. National income

National income refers to the combined amount a country's economic activity generates. Studying this figure can help economists track and measure the growth of an economy. They can also look at this income data in more detail, examining factors such as standards of living for different people within the country and income distribution.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

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