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. In this way, these terms serve as economic indicators of an economy’s health, and they help to show which direction it is growing or if it is dying.
The example of macroeconomics being the bark of the tree is to imply that it is a way of measuring how the economy as a whole is growing. Finance is the fruit, or what the market has been producing: money, credit, assets, investments and the like.
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 finances down into personal finances, corporate finances and public finances.
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
Keep in mind the example of macroeconomics being the bark of a tree, indicating the direction the economy is growing. Economists use the bark to describe large markets and microeconomics to describe the smaller systems, such as personal finance. When speaking of larger markets such as entire country, economists rely on macroeconomic terms.
When discussing macroeconomics, economists will often cite Keynesian economics, a demand theory. They use Keynesian economics to discuss the role of government intervention in the marketplace. This macroeconomics theory is considered a product of depression economics, as it was created out of criticism to U.S. policies during the Great Depression. In contrast to Keynesian economics, classical economics would suggest leaving the marketplace to fix itself.
Predicting Economic Forecasts
Economists, lawmakers and investors must understand both macroeconomics and finances in order to make good decisions. An investor who understands finances will know when to enter or leave an investment based upon inflation, interest rates and other factors. A lawmaker who understands macroeconomics theory knows which fiscal or monetary policies will work based on the way the economy has accepted those practices in the past.