Not sure I understand it well either, but that never stopped me before :-D
I think the upper-left quadrant of “describes well / never happens” is the domain of toy theories and toy problems. Microeconomics likely landed there because it tends to go “Imagine a frictionless marketplace with two perfectly rational and omniscient agents...”
The lower-right quadrant of “describes badly / happens all the time” is the domain or reality economics. It’s a mess and nobody understands it well but yes, it happens all the time. Macroeconomics was probably placed there because, while it has its share of toy theories, it does concern itself with empirical studies of what actually happens in reality when interest rates go up or down, money supply fluctuates, FX rates are fixed or left to float, etc.
Traditional microeconomics makes greater assumptions about the economic actors (that they are utility maximizing, have perfect information, in competitive markets with many participants, etc.) and based on those assumptions it is accurate in describing what happens mathematically. Macroeconomics doesn’t make as many assumptions because it’s based on the observed behavior of market participants in aggregate (GDP is just the sum of the four components of GDP, wages can be proven to be sticky the downward direction, and such), but macroeconomists are wrong or surprised all the time about the path of GDP and unemployment.
Note that I don’t necessarily agree with this characterization, but that’s what he’s going for.
If anyone got that microeconomics vs macroeconomics comic strip, feel free to explain… Possible related: inefficient hot dogs.
Not sure I understand it well either, but that never stopped me before :-D
I think the upper-left quadrant of “describes well / never happens” is the domain of toy theories and toy problems. Microeconomics likely landed there because it tends to go “Imagine a frictionless marketplace with two perfectly rational and omniscient agents...”
The lower-right quadrant of “describes badly / happens all the time” is the domain or reality economics. It’s a mess and nobody understands it well but yes, it happens all the time. Macroeconomics was probably placed there because, while it has its share of toy theories, it does concern itself with empirical studies of what actually happens in reality when interest rates go up or down, money supply fluctuates, FX rates are fixed or left to float, etc.
Traditional microeconomics makes greater assumptions about the economic actors (that they are utility maximizing, have perfect information, in competitive markets with many participants, etc.) and based on those assumptions it is accurate in describing what happens mathematically. Macroeconomics doesn’t make as many assumptions because it’s based on the observed behavior of market participants in aggregate (GDP is just the sum of the four components of GDP, wages can be proven to be sticky the downward direction, and such), but macroeconomists are wrong or surprised all the time about the path of GDP and unemployment.
Note that I don’t necessarily agree with this characterization, but that’s what he’s going for.