Microeconomics vs. Macroeconomics: A Comprehensive Guide

Microeconomics vs. Macroeconomics

Microeconomics studies the individual decisions of economic decision-makers (companies and consumers as individuals).

• Macroeconomics studies the economy as aggregate decisions of economic decision-makers (groups of consumers, producers, and the government).
  • The government is a group that oversees a community, establishing rules and administering public policy.
  • Some governments are more interventionist at the economy (North Korea, Cuba) than others (US). They make key decisions about what will be produced, how it will be produced, and who will receive the outputs supplied by business.
  • The role of government is to create and administer policy at local, national, and international levels.
  • Locally: they establish rules, local taxes, invest in local infrastructure, promote the area, etc.
  • Nationally: they establish national taxes and provide national services for citizens and business. They also make fiscal and monetary policies.
  • Internationally: they interact at an international level to create agreements and frameworks to support national and international economic development.

Economic Growth

Economic growth will be measured by the overall level of output of a nation. Governments can encourage growth helping private businesses to grow (for example, they can lower taxes).

Prices

Governments want to make sure that the general level of prices in the economy is controlled. Prices need to rise in a relatively slow way. In other case, we will have to face inflation.

Inflation is the continued growth of prices. It distorts the economy. Government policies to control inflation include reducing spending, by increasing the interest rates, or raising taxes.

Income Distribution

All economies are characterized by inequalities in income. The government needs to manage inequality and poverty in a way that is acceptable to society. Governments have to distribute incomes through taxation and other policies.

Balance of Payments

Governments want to make sure that there is a balance between imports and exports in a country. Government policies involve encouraging exports and discouraging imports.

Employment

The level of employment and unemployment is one of the most important indicators of the progress of the economy. Employment needs to be increased while unemployment needs to be minimized.

The Budget

It is the principal tool of fiscal policy. A budget is a plan setting out future spending and income in a national level. The government can spend more than it receives in taxes (a deficit budget). The government can balance spending (income is equal than spending). The government can spend less than it receives (a surplus budget).

Classification of Taxes

Taxes can be direct or indirect:

• Direct taxes: Taken directly from wages or salaries and paid to the government.
• Indirect taxes: Imposed by the government on goods or services. Paid by consumers, sellers collect these taxes and give them to the government.

Taxes can also be progressive, regressive, or proportional:

• Progressive taxes: Take a greater proportion of income from a wealthy person than from a poor person.
• Regressive taxes: The poor pay a higher percentage of their income in tax than the rich.
• Proportional tax: Taxes rise in proportion to the income of the taxpayer.

Employment

Employment is the work that people do in an economy.

The employment rate in a country is a very important indicator for government whose aim is full employment.

Full employment means that everyone who wants a job is able to find work to meet their own needs. It is a situation where most people are in work.

Economic Growth

Economic growth is traditionally associated with rising GDP.

Measuring GDP

• This involves adding together the final spending on outputs produced by a country. There are four types of spending:
  • Consumer spending (by households on goods and services)
  • Investment spending (by businesses on machinery and equipment)
  • Government spending (on goods, services, and investments)
  • Net exports (difference between exports and imports)

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