ECONOMICS: THE BIG PICTURE
Two Ways of Looking at the Economy
What are two major divisions in the field of economics?
Economics is a vast subject that can be studied and analyzed from a variety of viewpoints. Two of the most common divisions come under the headings of microeconomics and macroeconomics.
As you might infer from the micro in microeconomics, this view deals with "smaller" aspects of how the economy functions. A case in point is how individual companies conduct business.
Microeconomics also covers consumption of goods and services by households. Another viewpoint is macroeconomics—in economics, the big picture. As you read on, you will encounter some of the major topics that come under this rather broad heading.
Macroeconomics
This is, indeed, the big picture. Macroeconomics attempts to explain how and why the overall economy works. Instead of looking at how companies interact with each other and the government, it covers the most integral ingredients of the economy—a much broader view. This includes topics such as the Federal Reserve System, the Gross Domestic Product (GDP), inflation, and unemployment.
The Federal Reserve System
In the United States, we live within a capitalist system. All capitalist societies have a central banking system. In the United States, this is called the Federal Reserve System. It is often referred to as the Fed.
Created in 1913, the Federal Reserve System consists of 12 districts, each of which has a Federal Reserve Bank. Seven governors, appointed by the US president to a 14-year term, sit on the Federal Reserve Board. The governors' terms overlap presidential terms, so the political influence is minimized.
The Fed controls monetary policy by setting short-term interest rates and by regulating how much money is in circulation. For example, if there is a need to put more life into the economy, the Fed will cut interest rates. Consumers and businesses will then spend more money. The Fed might also authorize the release of more dollars into circulation.
Gross Domestic Product
The Gross Domestic Product, or GDP, is a measuring stick for the output of the economy. It is the dollar figure for the total value of goods and services produced. On the consumer side of the economy, the GDP is goods and services. On the business side, it is investments and capital goods. The GDP is also a leading economic indicator. Economists often use it to evaluate the vitality of the overall economy. Because the purchasing power of the dollar varies from year to year, GDP figures are adjusted annually to take inflation into account.
Inflation
One of the trends the Fed watches is the value of money. If the dollar buys less and there is an increase in prices, then there will be an inflationary trend. This can lead to big economic trouble.
The US Bureau of Labor Statistics is responsible for tracking prices of goods and services on a monthly basis. It prints a report called the Consumer Price Index (CPI) which compares prices from one month to another. The CPI is one tool economists use to monitor the strength of the dollar.
Unemployment
Another focal point for determining the state of the economy is the unemployment rate. This percentage is also monitored each month. A common misconception is that it is calculated based on a ratio of the number of people who are not working to the total number of jobs available. This is a very widespread misunderstanding about unemployment reporting. Actually, only unemployed individuals who are actively pursuing employment opportunities are counted as unemployed. A high unemployment rate signals the possibility of a recession.
This is just a glimpse into the world of macroeconomics. There are many more elements that comprise the universe of economics. We have tried to simplify the view of macroeconomics here. Many other books go into a much more complex approach. They may be your next step in discovering how the economy functions.
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