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What Are the Different Principles of Macroeconomics?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 05 December 2016
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Macroeconomics is the study of an economy as a whole, the different forces that affect it, and the measures that should be taken by governments to spur it in a positive direction. The principles of macroeconomics make if far different than microeconomics, which is concerned with the action of individuals within the economy, even though the two are interrelated. In macroeconomics, there tends to be a symbiotic relationship between certain phenomena, such as the way lower interest rates over time can lead to inflation. Economists study the various principles of macroeconomics and how each factors into the big picture of a nation's economy.

There are two ways that economists tend to look at the economic picture of a nation. One way is to study people or firms individually to see why they make the decisions that they do. Others tend to look at the aggregate results of all of that individual behavior. The latter method is known as macroeconomics, and the defining principles of macroeconomics often reverberate all the way down to affect the economic picture of the individuals within a society.

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This relationship between large scale and small scale is one of the defining principles of macroeconomics. In other words, the things that are happening to a nation's economy as a whole are generally reflective of what is going on in every community and household. For example, rising unemployment can positively affect a local firm that needs to hire new employees, because unemployment creates a larger pool of candidates from whom to choose, but it can also negatively affect households where the main earner has lost his or her job.

Another one of the principles of macroeconomics is that certain key components of the economy are commonly indicative of the state of the economy as a whole. The Gross Domestic Product (GDP) — a measurement of the amount of production coming from one particular country — is just one of these key components. Others include inflation levels, international trade, debt obligations to other countries, and unemployment levels. Although they don't always act in concert, it is generally true that existing levels in one category can be predicted by the levels in another.

Perhaps one of the most important principles of macroeconomics might be the effect of governmental stimulation on economic conditions. Many economists debate whether a government should step in when problems arise, or simply allow economic conditions to work themselves out naturally. For example, a government might lower interest rates to stimulate borrowing among consumers and spur buying. The downside of this is that it cheapens a country's currency and can lead to future inflation. Such decisions and the complications attached to them make macroeconomics crucial to economic analysis.

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