What Is Applied Macroeconomics?

Applied macroeconomics reviews specific aspects of a country’s economy in order to make assumptions. This process commonly looks at a country’s gross domestic product, which represents the market value of all goods produced by a nation. A company’s gross domestic product typically consists of three individual parts: consumption, investment, and government, or CIG. Applied macroeconomics looks at these three items and breaks them out into econometric models for further analysis. In some cases, this represents shoe leather economics that economists can walk around in, providing valuable analysis for users of this information.

Few economies are truly free market in nature. The government always plays some role, with the most common aspects of government intervention being money supply and interest rates. Applied macroeconomics tends to review these interactions and determine how much government interaction is necessary to grease the economy. For example, Keynesian economic theory looks more at demand than supply and how the government can help increase demand for goods. Not all assumptions in this review process are accurate as many economies are slow in moving through the business cycle.

Consumption is typically the biggest factor in a country’s economy, with levels of nearly 70 percent in some industrialized nations. Therefore, consumer interaction with an economy is often a large part of applied macroeconomics. Economists look for answers in how consumers act and why they are drawn to a certain type of good or service. Businesses are also consumers in some aspects, leading economists to review their actions as well. Finding the major underpinnings of consumption can help a nation create a sound economic environment.

Investment is mostly the actions of businesses in an economy. In free markets, the invisible hand plays a large role in this portion of a country’s gross domestic product. Here, applied macroeconomics attempts to understand the distribution of goods and why supply changes in a given economic state. The supply side of supply and demand is most likely the study here by economists. A close relationship exists with investment and consumption as economists attempt to draw conclusions on personal income and business activity.

Government is the last piece of a country’s gross domestic product. The amount of government spending in an economy can be an important review in applied macroeconomics. Other aspects reviewed include the fiscal and monetary policy a government implements to control the economic marketplace. Government consumption can also purchase the excess in a market, which may be a way to attempt to increase economic growth. This is not always the best applied macroeconomics policy, however.