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Overview of Economics

Will That Be Large or Small?

Economics has two main branches: macroeconomics and microeconomics.

Macroeconomics is what most people think of when they hear the word “economics.” Macroeconomics—“macro” means “large”—focuses on the study of whole systems of production and distribution, that is, whole economies and large sectors of the economy. “Macro” (as it is often called by economists and students) also focuses on broad levels of economic activity, such as overall income and production in an economy. Finally, macroeconomics examines the relationships among the sectors of the economy.

We'll be talking about sectors of the economy in more detail in GDP and the Players Three but, broadly, most economies contain a public sector—local, state (or provincial), and federal governments—and a private sector, which includes consumers, businesses, and nonprofit and nongovernmental organizations.

Microeconomics, as the name indicates, concerns itself with smaller portions of the economy. Microeconomics focuses on individual economic entities, such as a single business or household, or on specific economic activities or phenomena, such as employment or prices. For example, labor economics—the study of labor markets and wages—falls within microeconomics.

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Macroeconomics focuses on whole economies and large sectors of economies and on broad levels of economic activity, such as overall income, and on relationships among the sectors of the economy. Microeconomics focuses on individual economic entities, such as a single business or household, or on specific economic activities or phenomena, such as employment or prices.

Economic policies are measures that a government takes to help stabilize or grow its economy. Tools of economic policy include increasing or decreasing government spending and borrowing, adjusting certain interest rates, and increasing or decreasing taxes.

One other aspect of economics warrants mention: econometrics. (“Metrics” is just another word for measures.) The discipline of econometrics uses statistical methods to analyze economic behavior and problems. Much of econometrics focuses on forecasting economic activity, such as next year's auto sales or interest rate levels, or when the next recession will begin. Forecasting is among the most challenging areas of economics, and economic forecasts are notoriously inaccurate. Then again, so are weather forecasts. Like most views of the future, economic forecasts should be used to describe different potential scenarios and their possible effects.

As a social science, economics has most of the characteristics of other sciences. Economists observe behavior and outcomes, systematically catalog those observations (by collecting data), and identify patterns and trends. Then they develop and test theories to explain the behavior, outcomes, patterns, and trends they have seen. Although economists can rarely test their theories in controlled experiments, they do seek practical applications of their theories. These usually take the form of economic policies implemented by local, state, and federal governments. Economic policy also affects major management decisions by large corporations and financial institutions. .

For example, economists have formulated theories about the relationship between interest rates and the amount money businesses and consumers borrow. These theories help the government to develop policies that affect the ease with which people can borrow money, that is, use credit. The availability of credit affects the level of people's spending, which in turn affects the level of production, which affects the rate of economic growth.

The U.S. economy and even state and local economies cannot be completely controlled by the government or any other entity. They are too large and, as I mentioned, people's behavior is too complex to fully understand, let alone control. However, economic theory helps governments in their efforts to stabilize and grow their economies and temper the effects of bad economic conditions.

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Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book direct from the publisher, visit the Penguin USA website or call 1-800-253-6476. You can also purchase this book at Amazon.com and Barnes & Noble.

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