Definition of macroeconomics: The field of economics which attempts to model the behaviour of an economy, rather than the behaviour of individual participants.
What is macroeconomics?
Economics is an attempt by social scientists to create an accurate model which allows us to understand how, and why the economy works in the way it does.
Like all models, economics includes assumptions which simplify matters and allow the models to be practical to use.
The field of economics has diverged over time into two fields which use different models:
Microeconomics looks at the small scale, by modelling the behaviour of a single market by looking at how individual actors are incentivised to act.
- The invisible hand of free markets
- Monopoly and monopsony
- The law of supply and demand
- The diminishing marginal utility of labour and capital
- Indifference curves
- Game theory (how people make strategic decisions)
Macroeconomics steps back and looks at the largest scale. It concerns itself with total income, household consumption, government spending and flows of capital at a regional level.
- Aggregate demand
- Aggregate supply
- Philips curves
- Inflation & interest rates
- Slack in the labour market
- The trade deficit
- The budget deficit
It’s important to state that while these subjects are distinguished by the methods and principles they commonly use, these are unified fields of thought. You’ll find that economics books tend to cover either macro or microeconomics unless they’re aimed at beginners.
If you isolate a single variable in macroeconomics, it is possible to ‘zoom in’ and build a microeconomic model which explains how this overall impact is the sum of many individual actors, all behaving in accordance microeconomics principles.
How is the word macroeconomics used in a sentence?
“Students of macroeconomics will compare and contrast the history of capitalism versus command economies and communism.”
How does the definition of macroeconomics relate to investing?
Macroeconomics has strong links to the overall performance of the major asset classes. The best investing books and investing courses will help you gain a deeper understanding of how one can impact the other.
An example is the impact of changes in monetary policy, such as changing interest rates or engaging with quantitative easing, on the pricing of shares, bonds and so on.
When interest rates decrease, the prices of shares tend to rise because this will reduce an investor’s expected return in general.
With a lower expected return, investors will be prepared to pay more for a given financial return in the future. This means that the prices of existing assets such as equities will rise.
However, this is just one quick example of how macroeconomics can collide with the experiences of investors, here’s an overview of some other relationships which you may not be aware of:
Higher inflation may:
- Erode the real returns of investment portfolios.
- Increase the coupon rate of index-linked bonds
- Increase the nominal value of real assets such as commodities & gold, as opposed to monetary assets like a savings account.
Higher fiscal spending by government may:
- Increase the value of the stock market
- Reduce the value of government bonds
- Reduce the value of the domestic currency (causing forex traders to enjoy gains on holdings of other currencies)
People who invest in property will also be very interested in macroeconomics, as property values and rental incomes are quite sensitive to macroeconomic factors, such as interest rates and inflation.