Introduction to Macroeconomics

The economy as a whole: why macroeconomics arose after the Great Depression, the factors of production and their rewards, the four sectors and the unemployment rate.

Key ideas

• Macroeconomics studies aggregates of the whole economy, such as total output, employment and the general price level.
• It grew into a separate subject after the Great Depression that began in 1929, when output fell and unemployment stayed very high for years.
• Keynes’s General Theory (1936) argued that demand could be too low, leaving people unemployed for long periods.
• Land earns rent, labour earns wages, capital earns interest and entrepreneurship earns profit.
• In a capitalist economy private firms hire wage labour, produce for the market and aim at profit.
• The four sectors are households, firms, government and the external sector.
• Firms’ spending on new machines and buildings is investment expenditure, which adds to productive capacity.

Remember

Watch out

• Mixing up the rewards: interest goes to capital and profit to the entrepreneur.
• Finding the unemployment rate as a share of the whole population instead of the labour force.
• Calling the price of mangoes a macroeconomic variable.

Worked example