Macroeconomic refers to the study of aggregate economic factors, including total national income, output, employment, inflation rates, and the business cycle, as well as the analysis of policies affecting these elements within an economy.
Economics is broadly divided into microeconomics and macroeconomics. Microeconomics is essentially concerned with choices and activities at the individual or firm level. It is concerned with what goods firms decide to produce and what goods households decide to consume. The interaction of households and firms takes place within a market, where price movements seek to equate demand and supply. Typically these markets are combined to form what are termed ‘sectors,’ such as agriculture, manufacturing, or health care. Together the interaction of these sectors comprises ‘the economy.’ Macroeconomics is then concerned with choice and activities across a number of these markets and sectors, and thus ‘the economy’ as a whole. In doing so, a whole set of terminology different to microeconomics is found, the main ones outlined in the glossary in Box 1.
Box 1
Glossary
Appreciate
When a currency is rising relative to other currencies, it is appreciating in value.
Balance of payments (BOP)
Measures currency flows between countries. Payments are usually measured in the currency of the country that is paying. Payments made to other countries are seen as debits (e.g., imports) and payments received from other countries are seen as credits (e.g., exports). So an important indicator of a country's performance in international trade and investment is the level of surplus or deficit in their balance of payments.
Constant dollars
Constant dollars or currency correspond to values that have been adjusted for inflation and so reflect their 'real' or actual purchasing power as perceived from some base date.
Current dollars
Current dollars or currency refer to the actual dollars spent, with no adjustment for inflation.
Depreciation
When a currency is falling relative to other currencies, it is depreciating in value.
Depression
A sustained, long-term, downturn in economic activity – more severe than a recession, often judged as a 10% decrease in real Gross Domestic Product.
Economic growth
A positive change in the level of production of goods and services by a country, usually measured annually.
Exchange Rates
Exchange rates tell you how much one country's money is worth in another country's currency. If the value of a currency is going down relative to another, it is depreciating; if it is rising relative to other currencies, it is said to appreciate in value. Fluctuations in exchange rates are very important as every country imports and exports goods and services.
Fiscal policy
Policies introduced by the government to influence the economy through taxes and government spending.
Gross Domestic Product
GDP is the total expenditure by residents and foreigners on domestically produced goods and services in a year. It is the main indicator used to measure the size or output of an economy.
Gross national income
Gross National Income (GNI) measures the economic activities undertaken by residents and firms of that country regardless of where they take place. GNI is GDP plus income earned by its residents from abroad minus income earned in that country by residents of other countries abroad.
Inflation
General rise in prices over time. This means that money loses its value (purchasing power) through time.
Monetary policy
Policies by the government of adjusting interest rates and the amount of money in circulation.
Price index
A price index is created by selecting a bundle of goods and services according to the purpose of the index. Their prices are collected in a base year and compared with prices of the same bundle in another year. The overall price change of the goods in the bundle measures inflation. The price index is set at 100 for the base year and subsequent changes in prices are compared with this base year.
Purchasing power parity
An exchange rate that equates the prices of a basket of identical traded goods and services in different countries.
Recession
A downturn in the rate of economic activity, with real GDP falling in two successive quarters.
International Trade
An important element of macroeconomics is international trade. According to the ‘law of comparative advantage,’ free trade (i.e., exchange of goods) between countries encourages countries to produce the goods that they are best placed to produce compared with other countries. A comparative advantage exists when an individual, firm, or country can produce a good or service with less forgone output (opportunity cost) than another. This differs subtly from ‘absolute advantage’; for instance, where a country with lots of sunshine and wide open spaces could be seen to have an absolute advantage in agriculture compared to a country with little sunshine and mountains. Thus, call centers are increasingly located in countries such as India, not because their location there involves fewer inputs for any given number of calls or because wages are lower than elsewhere (which would confer an absolute advantage), but because the lost output from using people in this way rather than another way is smaller than it would be in, say, most European countries or North America. Conversely, research-based industries, like innovative pharmaceutical firms, are located mainly in high-income countries despite their relatively high wage levels because they too have a comparative advantage. Clearly, some countries may have an absolute advantage in producing nearly everything, but it is impossible for them to have a comparative advantage in everything. Conversely, some countries have an absolute advantage in virtually nothing, but they too necessarily have a comparative advantage in something. Given certain assumptions, total world production will therefore increase, and consumption possibilities increase, if countries specialize according to their comparative advantage and trade these goods with each other. Those countries that engage in trade will therefore see increasing gross domestic product (GDP), a wider selection of available goods and services, higher employment, and higher government revenues (due to higher income).
The problem of course is that, in practice, many countries create barriers to trade to ‘protect’ domestic industries, including tariffs, import restrictions, and bans. The effect of such protection is that it enables countries to continue to produce goods in which they have no comparative advantage, but at the same time discourages those countries who do actually hold the comparative advantage in such products. Why would a country do this? Typically this is specific political lobbying by an industry/sector or relates to an area deemed important for national security. However, the period since World War II has seen significant initiatives targeted to increase free trade, and has witnessed unprecedented increases in global trade activity.
Microeconomics stands as one of the two main pillars of today's economic science, the other being macroeconomics. Microeconomics seeks to understand how individuals, households, and companies make decisions; the factors that shape these decisions; and how these decisions affect others. Its object is decision making at low, or micro, level, in contrast to macroeconomics, whose focus is the behavior of national aggregates such as gross domestic product, inflation, and unemployment.
At the heart of microeconomics is a social and scientific ‘mystery.’ In modern market economies characterized by private property and freedom, decisions to produce, sell, work, buy, and consume are made by multiple individuals, households, and companies autonomously and independently from one another; each actor chooses under limited, or even inexistent, knowledge of the choices of others. Yet someone's decision to buy, say, a pint of milk can only translate into an actual purchase if someone else simultaneously decides to sell a pint of milk. So if buyer and seller do not coordinate ex ante, how can their decisions engender actual, mutually beneficial transactions, rather than result in disappointment and frustration? The market mechanism is the device that accomplishes this result: by establishing the relative price of goods and factors, it informs individual decisions, adjusts the quantities traded, and achieves ex post coordination. Microeconomics, through the supply-and-demand framework of analysis, looks at how this happens. It also studies the effects of institutions such as government regulation and taxation on individual choices and market outcomes.
In essence, microeconomics is as old as economic thought itself: Classics in the eighteenth and nineteenth centuries laid out the theoretical elements that have progressively molded economists' understanding of individual decision making and the market mechanism. Yet the ‘micro’ label and the representation of microeconomics as a separate enterprise, explicitly distinct from macroeconomics, emerged much later. According to Humberto Barreto (2012), its first traces are in a 1933 article by Ragnar Frisch for whom the micro approach would “try to explain in some detail the behavior of a certain section of the huge economic mechanism,” while the macro would instead “give an account of the fluctuations of the whole economic system taken in its entirety” (Frisch, 1933: p. 2). The work of John M. Keynes (1936) in those same years, with its strong focus on aggregate relations and an extremely simplified representation of individual behaviors, popularized the belief that the macro level of analysis differs in nature from the microlevel, and contributed to further differentiating the two subdisciplines.
Since then, it took another 50 years before economists formally acknowledged the micro–macro taxonomy. In the classification of subject fields of the Journal of Economic Literature, a reference for the profession worldwide, micro- and macroeconomics were subsets of a broad ‘theory’ category in the original 1960 version, and were brought up a level and highlighted as major independent categories in a substantial revision of the system in 1991 (Barreto, 2012). They remain two major areas today, allowing the development of new or renewed subfields within them. The teaching of economics has followed suit, with current curricula typically separating micro- and macroeconomics courses, both being part of the core training of new economists.
Perhaps ironically, a parallel movement has been increasingly blurring the distinction between the micro and macro approaches. Economists have grown more and more uncomfortable with the idea that different theoretical principles apply to the study of individual decisions and the aggregates that (ultimately) result from them. Since the late 1980s the ‘microfoundations’ movement in macroeconomics, championed by Robert Lucas (born 1937), aims to reconcile these two traditions and rebuild macroeconomics so as to make it consistent with the principles of microeconomics.
This article provides a brief overview of the history of microeconomics, starting from the time in which its key foundations were laid, although the ‘micro’ terminology was not yet in use. Despite the interest of the early literature, which dates as far back as antiquity and the Middle Ages (see, e.g., Hutchison, 1988), a detailed account of it would be beyond the scope of this article, and the more traditional convention of starting from the late eighteenth century is followed. The article overviews historical developments since then, without intending to be comprehensive, but aiming only to outline landmarks and milestones in the building of the basic principles of today's knowledge, highlighting the challenges faced and the questions that remain open. Focus is on what each historical phase contributed to the understanding of the two foundational issues in microeconomics – namely, the theory of individual economic decision making and the market mechanism as a coordinating device. At the end, the article discusses the current state of microeconomics and recent tendencies, again distinguishing between the study of individual behaviors and the market mechanism.
The field that became known as macroeconomics emerged from long and rich traditions of monetary theory, business cycle analysis, and discussion of economic growth. Macroeconomics is the analysis of aggregate levels and rates of change of output and employment, the price level (and its inverse, the purchasing power of money), the interest rate, and the balance of payments. This field had a long history before it received its name with Ragnar Frisch's (1933) distinction between macrodynamics and microdynamics and before John Maynard Keynes' General Theory of Employment, Interest and Money (1936). This article analyzes the ‘prehistory’ of the concept – the various strands of economic thinking that coalesced in about 1933 to produce modern macroeconomics, i.e., roughly the history of macroeconomics up to Keynes. The subsequent history is covered in a companion article, “Macroeconomics, history of, from 1933 to the present.”
The history of modern macroeconomics begins when much older economic questions were reclassified by Ragnar Frisch under the headings ‘microeconomics’ and ‘macroeconomics.’ The history of macroeconomics related here is importantly a history of the relationships of macroeconomics to microeconomics, and econometrics. The emphasis is on the development of macroeconomics as an interplay among economic theory, empirical investigation, and public policy.
How Does Macroeconomics Relate to Health and Health Care?
In this article, the term macroeconomics is used to refer to consideration of issues that fall outside of the health (care) sector. Thus it is not concerned with the inner workings of the health sector – such as how doctors are paid, or the cost-effectiveness of alternative screening programs – but the wider interactions between health and economy, health versus other sectors, and trade impacts on health. In this respect, there are a range of proximal and distal linkages between macroeconomics and health; illustrated in Figure 1. The lower half of the figure represents the individual country under consideration, and the upper half the aspects of the international system. The arrows between the various components indicate the major linkages. This is a deliberately simplified picture to provide a concise and understandable frame of reference.
Figure 1. Major elements and linkages between macroeconomics and health.
Taking the lower half of the figure first, what may be termed as the ‘standard’ influences on health are illustrated. These include risk factors, representing genetic predisposition to disease, environmental influences, and infectious disease. Next is the household, which represents factors associated with how people behave and, crucially, invest in their health. There is then the health sector, which comprises those goods and services consumed principally to improve health status. Finally, encompassing all these, there is the national economy, representing the metainfluences of government structures and other sectors.
In the upper half of the figure, the influences of factors that are usually outside national government jurisdictions are illustrated. For example, there is a wide variety of international influences directly upon risk factors for health, including an increased exposure to infectious disease through cross-border transmission of communicable diseases, marketing of unhealthy products and behaviors, and environmental degradation. Increased interaction in the global economic system will also affect health through influences upon the national economy and wealth. It is well established, for instance, that economic prosperity is ‘generally’ positively associated with increased life expectancy. Finally, health care will be affected through the direct provision and distribution of health-related goods, services, and people, such as access to pharmaceutical products, health-related knowledge and technology (e.g., new genomic developments), and the movement of patients and professionals. Also note that in this upper half of the figure, the importance of international legal and political frameworks that underpin much of these activities, such as bilateral, regional and multilateral trade agreements is seen.
In terms of linkages between these influences, increased macroeconomic trade will bring associated changes in risk factors for disease. These will include both communicable diseases, as trade encourages people and goods to cross borders, and noncommunicable diseases, as changes in the patterns of food consumption, for instance, are influenced by changes in income and industry advertising. Increased macrolevel interaction will also impact upon the domestic economy through changes in income and the distribution of that income, as well as influencing tax receipts. This will influence the household economy and also the ability of the government to be engaged in public finance and/or provision of health care. Finally, there will be direct interactions in terms of health-related goods and services, such as pharmaceuticals and associated technologies, health care workers, and patients. Let us explore these in a little more detail.
Macroeconomics and the Household
Macroeconomic policy is concerned with economic growth – increasing levels of GDP – as higher GDP leads to greater opportunities to consume which will, ceteris paribus, improve health (although it may not!). The relevant factors in this relationship are improved nutrition, sanitation, water, and education. In this respect, engaging in global macroeconomic integration – or international trade – is a key factor leading to economic growth through specialization. However, although trade liberalization may be poverty-alleviating in the long run, at least in the short term it is often the adverse consequences, particularly to the most poor, that are observed (e.g., increased cost of living, development of urban slums, chronic disease, pollution, and exploitative and unsafe work conditions) and lead to significant ill-health.
One of the criticisms of conventional macroeconomic approaches is the inadequate attention paid to distributional impacts – most are generally based on the aggregate indicators such as ‘total’ income, trade volume, employment, etc. This reflects a focus on growth and efficiency over equity. Thus, although trade liberalization may be advantageous, the crucial factor in how advantageous and to who depends on how countries manage the process of integrating into the global economies. For example, employment creation through economic growth is often also accompanied by job destruction as labor moves from one sector or industry to another. In the absence of social safety nets, not only does such economic insecurity potentially push people into poverty, but it can also impact on health through the stress caused by economic and social dislocation.
Another important aspect of macroeconomic growth and health is that of the stability of the growth. Economic instability results in volatile markets, increased frequency of external shocks, and increased impact of such shocks. These translate into economic insecurity for an individual, which is closely linked to increased stress-related illness. It will also affect the adequacy of financial planning for ill-health by the household and the (public and private) health sector, and generate investor reluctance (including within the health sector itself).
Economic stability is affected, among other things, by the proportion of income/growth dependent on trade, with the general view that trade liberalization, especially in financial services and in the movement of capital, results in volatile markets. Of course, being an open economy does not automatically lead to economic instability/shocks – it is smaller, often developing countries, where trade contributes a much higher share of GDP that are more vulnerable as they rely more on imports and exports.
Macroeconomics and Risk Factors for Disease
It is well documented that there are many ‘social determinants of health,’ which refer to the general conditions in which people live and work and which influence their ability to lead healthy lives. These include factors such as employment, nutrition, environmental conditions, and education. These ‘social determinants’ contribute to the risk of different diseases and are often seen to differ in their role in influencing communicable and noncommunicable diseases.
The contribution of macroeconomics to the spread of communicable diseases is made in two ways. First, the overall environment in which people live (concerned with pollution, sanitation, etc.) is determined – in large part – by their income and wealth. Second, the increased international movement of people, animals, and goods associated with increased trade will affect the movement of disease. This is illustrated well by the example of SARS and other areas.
Perhaps less obvious is the relationship between macroeconomic activity and noncommunicable disease. Although macroeconomic growth can be beneficial when it leads to an expansion in the consumption of the goods that improve health, such as clean water, safe food, and education; it also facilitates the increased consumption of goods which may be harmful or hazardous to health, which may be termed ‘bads.’ Trade liberalization will reduce the price of imported ‘bads’ through reduced tariff and nontariff barriers, and increase the marketing of ‘bads,’ such as tobacco, alcohol, and ‘fast food.’ In the case of alcohol and tobacco, the development of regional trade agreements have helped to significantly reduce barriers to trade in tobacco and alcohol products, by breaking up the hitherto protected markets, contributing to enhanced consumption.
In terms of food-related products, increased macroeconomic integration will affect the entire food supply chain (levels of food imports and exports, foreign direct investment in the agro-food industry, and the harmonization of regulations that affect food), which subsequently affects what is available at what price, with what level of safety, and how it is marketed. For example, in what is termed the ‘nutrition transition,’ populations in developing countries are shifting away from diets high in cereals and complex carbohydrates, to high-calorie, nutrient-poor diets high in fats, sweeteners, and processed foods. Increased trade liberalization is one driver of the nutrition transition because it has had the effects of increasing the availability and lowering the prices of foods associated with the growth of diet-related chronic diseases, as well as increasing the amount of advertising of high-calorie foods worldwide. Furthermore, trade and economic development encourages the use of labor-replacing technologies, such as cars, and creates greater leisure time, both of which in turn can be seen to encourage more sedentary lifestyles.
Macroeconomics and the Health Sector
Perhaps the most visible link between macroeconomics and health is at the overall level of health care spending. Most nations, rich or poor, face the problem of rising health care costs and confront two basic questions: How to finance this rising burden and how to contain the pressures for health expenditure growth. Here, the critical issues relate to government-funded health care, where the ability to finance and/or provide public services is determined by tax receipts. Tax income is broadly dichotomized into taxes that are ‘easy to collect’ (such as import tariffs) to those that are ‘hard to collect’ (such as consumption taxes, income tax, and value added tax). Tariff revenues are a very important source of public revenues in many developing countries.
Trade liberalization, by its nature reduces the proportion of government income from ‘easy to collect’ sources. Although theoretically, governments should be able to shift tax bases from tariffs to domestic taxes, such as sales or income taxes, in practice, developing countries, especially low-income countries, find this difficult, especially because of the informal nature of their economies with large subsistence sectors. Low- income countries are usually able to recover only approximately 30% of the lost tariff revenues resulting in a decline of government income available to pursue public policies, be it through health care, education, water, sanitation, or a social safety net.
The exchange rate is also a key determinant of the relative prices of imported and domestically produced goods and services. For many countries, products such as pharmaceuticals, but also various elements of other technologies, such as computer equipment, surgical tools, and even lightbulbs, used to provide health care are imported. Changes in the exchange rate brought about by macroeconomic developments may therefore see the price, and hence cost, of health care increase or decrease. Conversely, changes in demand for domestically produced goods from overseas importers may see the price of those goods domestically change in response (e.g., increased foreign demand may push up local prices). Increased linkage between economies at the macrolevel thus generates greater levels of exogenous (i.e., beyond the domestic health sector control) influences over prices, and hence cost of health care.
Finally, the health sector is increasingly involved in the direct trade of health-related goods and services. For instance, spending on pharmaceuticals represents a significant portion of health expenditure in all countries. Pharmaceuticals are also the single most important health-related product traded, comprising approximately 55% of all health-related trade by value (the share of the next most significant health-related goods traded, small devices and equipment, is <20%). The market is highly concentrated, with North America, Europe, and Japan accounting for approximately 75% of sales (by value). Overall, high-income countries produce and export high-value patented pharmaceuticals and low- and middle-income countries import these products; although some produce and export low-value generic products. This leads to many developing countries experiencing a trade deficit in modern medicines, which often fuels an overall health sector deficit.
Trade in health capital and services has also expanded greatly in the last decade, in large part due to improvements in information and communication technology. These improvements have contributed, for instance, to the remote provision of health services from one country to another, known as ‘e-health.’ Examples of services provided include diagnostics, radiology, laboratory testing, remote surgery, and teleconsultation.
Another type of trade in health services arises from the consumption of health services abroad. This is also known as ‘health tourism’ and it entails people choosing to go to another country to obtain health care treatment. This attracts approximately four million patients each year, with the global market being estimated to be US$ 40–60 billion.
As liberalization increases and migration becomes easier, the movement of people across borders also increases. As a result, many health professionals choose to leave their home countries for richer, more developed ones. This is the case for doctors, nurses, pharmacists, physician assistants, dentists, and clinical laboratory technicians. It is estimated that in the UK, the total number of foreign doctors increased from 20 923 in 1970 to 69 813 in 2003. These figures may not seem that significant, but they often represent a large share of a country's total doctors. In Ghana, for example, the number of doctors leaving accounts for 30% of the total number of doctors.
The problems addressed by the field now called ‘macroeconomics’ are ancient (seeMacroeconomics, History of up to 1933); yet the modern era begins in 1933 only with the coinage of the terms macroeconomics and microeconomics (almost certainly) by Ragnar Frisch, who also coined the term econometrics at about the same time (Velupillai, 2009). All three terms circulated informally – first, through the newly formed econometric society – before slowly becoming accepted as defining the broadest conceptual divisions of economics. For Frisch, microeconomics concerned the behavior of individual firms or consumers, whereas macroeconomics concerned the economy in its entirety. Practically, macroeconomics must give up on fine detail and deal with aggregated data. The history of modern macroeconomics is importantly a history of its relationships to microeconomics and econometrics.
Econometrics for Frisch was scientific economics and involved the cooperation of economic theory, mathematics, and statistics (Bjerkholt, 1998; Louçã, 2007). Like many others at the time he was concerned especially with dynamics, accounts of the movements of economic quantities over time. Jan Tinbergen gave life to the econometric project with the first macroeconometric model, a model of the Dutch economy in 1936. The worldwide Great Depression brought the problem of business cycles into the forefront of economics and debates over a correct understanding of the crisis raged throughout the 1930s. Tinbergen's approach had been pragmatic and not deeply committed to a particular theory.
While John Maynard Keynes never used the term ‘macroeconomics,’ it was only with the publication of his General Theory of Employment, Interest, and Money (1936) that its common theoretical core began to take shape. Keynes argued that earlier ‘classical’ economists failed to offer a theory of output as a whole, believing that market coordination was sufficiently effective that full employment of labor and capital failed only when market ‘imperfections,’ such as government regulation or unions intervened. In contrast, Keynes argued that, in complex, monetary economy, perfectly functioning markets may fail to be self-adjusting.
As a matter of accounting logic, aggregate savings in an economy (mainly lodged in financial assets) had to equal aggregate investment (mainly in the form of machinery and other physical means of production). But savers and investors were typically distinct actors: individuals, motivated by thrift, caution, and habitual psychology, made savings decisions; while firms in the face of a radically uncertain future, motivated by subjective expectations of profits, made investment decisions. Interest rates, representing the opportunity cost of real capital relative to financial assets were an important determinant of investment; while income was the most important determinant of consumption and savings. Formal financial markets operating through interest rates were inadequate by themselves to bring the plans of investors and savers into line. When savings plans exceeded investment plans, firms would find themselves with unsold goods and would be forced to cut back production and lay off workers – reducing incomes and bringing aggregate demand (i.e., planned total expenditure) back into line with aggregate supply (i.e., the value of total production), but at the cost of increased unemployment. Highly heterogeneous labor market inhibited the ability of workers effectively to offer to work for lower wages at times when demand for the products of firms fell short of their expectations, resulting in unemployment. The economy could be stuck for long periods in recession. The government could start a virtuous circle, directly stimulating demand through direct purchases, generating incomes that, in turn, generated further demand – a multiplier process. More important, the improved estimation of future profits would increase private investment and push the economy toward full employment. Keynes' position was, contrary to Marxist criticism, not that capitalism was doomed to failure. Rather it often – and sometimes severely – underperformed. Yet, helpful policy interventions were possible.
Immediately on publication, the economics profession began to try to understand and interpret Keynes' General Theory. What ultimately came to be called the IS-LM model, due to John Hicks (1937), became the most influential interpretation. Hicks stripped the General Theory down to its architectural bare bones, stressing its commonalities with its ‘classical’ precursors and downplaying its more radical elements, such fundamental uncertainty and coordination failures. Hicks' simple model proved to be easily taught and a useful framework for econometric modeling and mathematical elaboration. While it clearly captured some of the essentials, Keynes, himself trained as a mathematician, was skeptical of the value of detailed formal modeling.
In 1938 and 1939, Tinbergen published a two-volume study based on the first econometric model of the United States economy. Utterly convinced of the wrongheadedness of the econometric project, Keynes published a scathing review (Morgan, 1990).
Macroeconomics can have a measurable impact on health and health care. The aim of this article is to introduce the macroeconomics of health and health care. The article will outline the core features and terms related to macroeconomics, as distinct from microeconomics, and then give an overview of the relationship between the macroeconomy and health and health care. It will thus consider, for example, the relationship between health care expenditure and national income, and provide an overview of the routes through which greater macroeconomic integration at the global level may impact on health and health care via international trade.
Much of macroeconomics is concerned with the allocation of physical capital, human capital, and labor over time and across people. The decisions on savings, education, and labor supply that generate these variables are made within families. Yet the family (and decision making in families) is typically ignored in macroeconomic models. In this chapter, we argue that family economics should be an integral part of macroeconomics and that accounting for the family leads to new answers to classic macro questions. Our discussion is organized around three themes. We start by focusing on short- and medium-run fluctuations and argue that changes in family structure in recent decades have important repercussions for the determination of aggregate labor supply and savings. Next, we turn to economic growth and describe how accounting for families is central for understanding differences between rich and poor countries and for the determinants of long-run development. We conclude with an analysis of the role of the family as a driver of political and institutional change.
Macroeconomic data cover groups of economic units at different levels of aggregation up to and including the economy as a whole, i.e., the entire set of economic units resident in a country. Most macroeconomic data measure the aggregate values of sets of transactions associated with economic activities such as production, consumption, or financing. However, macroeconomic data may also refer to the values, at a point of time, of stocks of physical or financial assets owned by groups of units. The distinction between a stock, which can only be measured at a point of time, and a flow, which can only be measured per period of time, is of course fundamental.
Macroeconomic data are meant to provide a comprehensive picture of the economic activities taking place within an economy. They are used to monitor short- and long-term changes in the level of economic activity. They provide the information needed for purposes of fiscal and monetary policy by governments and central banks and also the data needed for purposes of economic analysis and forecasting by governments, universities, research institutes, or other agencies. For these purposes, it is necessary to measure how much of the change in an economic aggregate is due to changes in the prices of the goods and services concerned and how much to changes in their quantities.
The first part of this article is concerned with the System of National Accounts (SNA) in which the values of macroeconomic aggregates are measured at current prices. The second part is concerned with the associated price and quantity indices. Price and quantity indices are important macroeconomic statistics in their own right. For example, consumer price indices (CPIs), which measure changes in the prices of consumption goods and services purchased by households, have traditionally been used for index linking; that is, adjusting wage rates or social security benefits for the effects of inflation. They are also used as proxies for general measures of inflation for purposes of monetary policy.
Macroeconomic data are inevitably subject to error. Some data are based on surveys of businesses or households conducted by statistical office specifically for the purpose, but others are estimates that draw upon more than one data source, including data collected by government agencies for administrative purposes.
As macroeconomic data need to be as up to date as possible for economic forecasting and policy making, there is considerable pressure from users to obtain the data as quickly as possible. There is inevitably a trade-off between timeliness and reliability when the underlying raw data only become available piecemeal and gradually over a long period of time. The earlier the estimates are made and released, the greater the risk that they may have to be substantially revised later when more data become available. Minor revisions seem be acceptable to users as the price to be paid for receiving data on a timely basis, but major revisions can undermine the credibility and usefulness of the data.
Economists generally distinguish between two branches of their science: macroeconomics and microeconomics. Macroeconomics deals with the performance of the overall economy, seeking, for example, to increase employment, control inflation, improve productivity, and in general promote prosperity. These goals are well understood and widely accepted. Microeconomics studies how individuals, households, and firms make decisions in allocating limited resources, typically when they exchange them in markets. The study of microeconomics has a normative dimension or discipline, called welfare economics, which pursues goals such as efficiency, utility, well-being, and the maximization of benefits over costs.
Environmental economics as a branch of welfare economics studies how these goals – in general, microeconomic efficiency – are to be advanced or achieved in the allocation and exchange of scarce environmental goods. Environmental economists generally study how environmental assets can be allocated or traded more efficiently so that their consumption or use will maximize welfare or well-being, which is typically defined or measured in terms of peoples’ willingness to pay (WTP) for those goods or resources. Textbooks in environmental economics generally stipulate the equivalence of (1) welfare, well-being, or benefit with (2) the satisfaction of preference as measured or indicated by WTP.
This article discusses how environmental economists understand and defend the normative concepts on which they rely – concepts such as “welfare,” “efficiency,” “externality,” “benefit,” and “cost” – and how and why these economists use WTP to define or measure those concepts or values. The article then describes the political role the language of environmental economics plays or should play in debates and decisions involving environmental policy.
