What is the difference between macroeconomics and finance?

Economics is a broad category that encompasses both macroeconomics and finance. Macroeconomics refers to behaviors of large sections of markets, such as the unemployment rate of an entire country. The economics term "finance" is used to discuss the specific ways money is created and managed. When economists discuss finance, they tend to cite specific interest rates, prices and trends in financial markets.

Two Parts of the Same Economics Tree

Macroeconomics and finance are related because they are offshoots of economics. They are used by lawmakers, politicians, entrepreneurs and business owners when discussing the economy. However, their scope of topics and applications differ some. Economics is a social science that explains how sections of the market produce, distribute, and consume goods and services.

If each economy is a tree, then macroeconomics would be a way to describe the tree's bark, and finance would be a way to describe its fruit. The bark and the fruit both serve a purpose. As?the bark of the tree, macroeconomics is?a way of measuring how the economy as a whole is growing. Finance is?what the market has been producing (the fruit): money, credit, assets, investments and the like.?

These terms serve as economic indicators of an economy's health, and they help show which direction it is growing, or if it is dying.

More on Finance

The fruit of the marketplace is money. Of course, there's much more to finance besides just money. Finance includes debts, credits, banking, assets and liabilities. Many economists break finance?down into personal, corporate?and public.

One of the key financial concepts is establishing the fair value of products or services. Knowing how to estimate fair value is important to investors. Investors in the marketplace must make precise decisions based on quantifiable numbers. Financial knowledge is crucial to these decisions.

More on Macroeconomics

Economists use macroeconomics to describe large markets, such as an entire country, and microeconomics to describe the smaller systems, such as personal finance. When discussing macroeconomics, economists will often cite Keynesian economics and demand theory when discussing the role of government intervention in the marketplace. This macroeconomics theory is considered a product of depression economics, as it was created by Joh Maynard Keynes in an attempt to understand U.S. policies during the Great Depression. Keynesian economics focuses on short-term changes brought on by government intervention, where classical economics would suggest leaving the marketplace to fix itself.

Predicting Economic Forecasts

Economists, lawmakers and investors must understand both macroeconomics and finance to make good decisions. An investor who understands finance will know when to enter or leave an investment based on inflation, interest rates and other factors. A lawmaker who understands macroeconomics knows which fiscal or monetary policies will work based on the way the economy has accepted those practices in the past.

(For related reading, see Macroeconomics.)

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  1. University of Minnesota. “32.1 The Great Depression and Keynesian Economics.”

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