Macroeconomics focuses on the analysis of economies in their entirety.

It seeks to provide answers to some of the most important economic and social concerns, such as the ones relating to economic growth, fluctuations in output, employment, and inflation, and the role of monetary and fiscal policy.

Why are some countries “rich” and others “poor”? What determines the improvement of living standards and the process of economic growth? Why are there recessions and upswings in economic activity? What are the causes and consequences of inflation? What are the determinants and consequences of unemployment and its fluctuations? What are the possibilities for government policy to promote economic growth, counter recessions, and maintain low inflation and unemployment?

These and a host of related questions have occupied social thinkers even before economics was founded as a separate discipline, following the publication of Adam Smith’s pathbreaking 1776 book, The Wealth of Nations. Smith sought to systematically analyze the causes of differences in wealth and living standards across countries. In the process, he founded economics as an academic discipline that was separate from the other social sciences. Following the publication in 1936 of The General Theory of Employment, Interest and Money by John Maynard Keynes, macroeconomics eventually emerged as a separate subdiscipline of economics.¹

Macroeconomics uses relatively simple, aggregate, general equilibrium models that focus on the operation of three sets of markets. The first is the market for goods and services. Such goods and services are typically assumed to consist of a homogeneous final output. The second is the set of markets for factors of production, which are usually assumed to be mainly capital and labor. The third is the set of markets for financial assets, such as interest-yielding securities and money.

In the context of macroeconomic models, the main groups of agents assumed to be making choices are households, firms, and the government, or independent government agencies, such as a central bank.

Through their choices and their market interactions, economic agents determine macroeconomic outcomes, such as the volume of production and consumption, employment and unemployment, investment and capital accumulation, real wages and real interest rates, taxes and government debt, the price level and inflation, and nominal wages and interest rates.

1.1