Fundamentals of Macroeconomics - Microeconomics and Macroeconomics

Part one

Microeconomics and macroeconomics are very much interrelated. Microeconomics is the study of individual choice and how that choice is influenced by economic forces. Microeconomics studies such things as the pricing policies of firms, households’ decisions

on what to buy, and how markets allocate resources among alternative ends. Macroeconomics is the study of the economy as a whole. It considers the problems of inflation, unemployment, business cycles, and growth. Macroeconomics focuses on aggregate relationships such as how household consumption is related to income and how government policies can affect growth (Colander, 2010). This paper will attempt to describe certain terms to give one a better understanding of macroeconomics. Additionally, we will take a closer look at purchasing groceries, massive layoffs of employees, and decrease in taxes to see how each of these activities affect government, households, and businesses.

When trying to define macroeconomics, knowing the meaning of certain terms can be helpful. There are many factors that affect the economy such as gross domestic product (GDP), real GDP, nominal GDP, unemployment rate, inflation rate, and interest rate. GDP is the total value of goods and services produced in a country’s economy, typically over one year. Economists measure growth with changes in real GDP which is GDP that has been adjusted for inflation. To separate increases in GDP caused by inflation from increases in GDP that represent real increases in production and income, economists distinguish between nominal GDP, which is the sum of GDP at existing prices, and real GDP (Colander, 2010).

Unemployment, inflation and interest rates are also important factors that concern economists. Unemployment happens when people are looking for a job and cannot find one. Similarly, the unemployment rate is the number of people in the economy who are able to work and want to work, but are without jobs. The U.S. unemployment rate is determined by dividing the number of people who are unemployed by the number of people who are employed, and multiplying by 100 (Colander, 2010). Inflation is when the price level of a good or service continues to rise. It is important to note that a one-time rise in the price level is not inflation. For example, if the price of something goes up 8 percent in a month but remains constant, then the economy is not in danger of an inflation issue because inflation is an ongoing rise in price. Interest rates are the prices that are charged or paid for the use of a financial asset, such as mortgage interest rates, interest rates on credit cards, and interest rates on government bills, interest rates on corporate bonds (Colander, 2010).

Part two

Choices made by government, households, and businesses can make an impact on the economy. Consider a family buying groceries as an example.