Chapter Introduction


Macroeconomics: The Big Picture



Spanish students protest government cuts and the lack of jobs, holding aloft a banner that proclaimed, “The Youth say ‘Enough’!”
Luca Piergiovanni/Demotix/Corbis

What You Will Learn in This Chapter

  • What makes macroeconomics different from microeconomics

  • What a business cycle is and why policy makers seek to diminish the severity of business cycles

  • How long-run economic growth determines a country’s standard of living

  • The meaning of inflation and deflation and why price stability is preferred

  • The importance of open-economy macroeconomics and how economies interact through trade deficits and trade surpluses

image | interactive activity

IN 2012 JAVIER DIAZ, A 25-YEAR-old Spanish college graduate, found himself where he never expected to be: unemployed and living at home. He went to college with the intention of becoming a teacher, but by the time he graduated, no one would offer him a job. And we mean any kind of job. Diaz was willing to work at McDonald’s, but even that wasn’t an option.

Was this lack of job prospects a reflection on Mr. Diaz’s qualifications? Probably not. No matter who you were, finding a job in Spain in the year 2012 was tough indeed. Of Spaniards under the age of 25 seeking work, 57%—that’s right, 57%—were unemployed. Having a college degree didn’t help much: the unemployment rate among recent college graduates was 39%.

Yet it wasn’t always like that. Five years earlier Mr. Diaz probably would have found it fairly easy to get a job that made use of his education. In 2007–2008, however, much of the world economy, the United States included, plunged into a severe slump. The United States and some other countries began recovering from the slump in 2009, although the recovery was slow and painful. But as of 2012 Spain and a number of other European countries hadn’t recovered at all—in fact, unemployment kept rising.

As bad as things were for the global economy after 2007, they could have been much worse. In fact, they were much worse during an epic global slump that began in 1929 and persisted until the beginning of World War II. It was a time of severe economic troubles known as the Great Depression. To emphasize that the troubles were the worst since the Great Depression, economists refer to the downturn that began in 2007 as the Great Recession.

Why wasn’t the slump after 2007 as bad as the slump after 1929? There were many reasons, but one stands out: economists learned something about what to do from the earlier catastrophe. When the Great Depression struck, political leaders and their economic advisers literally had no idea what to do. Fortunately, during the Great Recession they did know what needed to be done, although not all of the good advice on offer was taken.

At the time of the Great Depression, microeconomics, which is concerned with the consumption and production decisions of individual consumers and producers and with the allocation of scarce resources among industries, was already a well-developed branch of economics. But macroeconomics, which focuses on the behavior of the economy as a whole, was still in its infancy.


What happened to much of the world during the Great Depression and during the Great Recession—and has happened in many other times and places, although rarely with the same severity—was a blow to the economy as a whole. During normal times, at any given moment there are always some industries laying off workers. For example, the number of video rental stores in America fell as consumers turned to Netflix and streaming movies at home. But workers who lost their jobs at video rental stores had a good chance of finding new jobs elsewhere, because other industries were expanding even as video rental stores shut their doors. However, in Europe and America during the Great Recession, there were no expanding industries: everything was headed downward.

Macroeconomics came into its own as a branch of economics during the Great Depression. Economists realized that they needed to understand the nature of the catastrophe that had overtaken the United States and much of the rest of the world in order to extricate themselves, as well as to learn how to avoid such catastrophes in the future. To this day, the effort to understand economic slumps and find ways to prevent them is at the core of macroeconomics. Over time, however, macroeconomics has broadened its reach to encompass a number of other subjects, such as long-run economic growth, inflation, and open-economy macroeconomics.

This chapter offers an overview of macroeconomics. We start with a general description of the difference between macroeconomics and microeconomics, then briefly describe some of the field’s major concerns.