How Macroeconomics Differs from Microeconomics

Macroeconomics deals with the economy as a whole. While microeconomics studies the behaviour of individual units like households and firms, macroeconomics looks at the big picture — the entire economy together.

Macroeconomics tries to answer questions that concern the economy as a whole:

• Will prices in general rise or fall?
• Is employment in the country improving or worsening?
• What indicators tell us whether the economy is doing better or worse?
• What steps can the State or people take to improve the overall economy?

A crucial observation makes macroeconomics possible — things in the economy tend to move together:

• When foodgrain output grows, industrial output also tends to grow.
• Different industrial goods tend to rise or fall together.
• Prices of many goods and services tend to move together — all rising during inflation, all falling during deflation.
• Employment levels across different production units also tend to move in the same direction.

Because of this co-movement, economists can work with totals and averages for the whole economy instead of tracking every individual good separately.

Since output, price, and employment across the economy move together, macroeconomists work with a single representative good — an imaginary good that stands for the entire economy:

• Its production level represents the average production of the whole economy.
• Its price represents the general price level of the economy.
• Its employment level represents the general employment condition of the country.

This simplification allows macroeconomics to study total production and employment by relating them to key variables:

The entire framework of macroeconomics rests on one key assumption:

What happens to one commodity broadly happens to all others — this is most clearly visible during economy-wide events like inflation or depression.