Macroeconomics vs. Microeconomics: An OverviewEconomics can be divided into two types: macroeconomics and microeconomics. Macroeconomics focuses on the analysis of individual and business decisions. Microeconomics focuses on the decisions made by governments and countries.
Although these two branches of economics may seem different, they actually complement each other. There are many overlaps between these two areas.
Microeconomics
Microeconomics studies the decisions of individuals and businesses about the allocation of resources and the prices at which they trade goods or services. It includes taxes, regulations, as well as government legislation.
Microeconomics is a study of supply and demand, and other factors that affect the price levels in an economy. This approach is bottom-up to economic analysis. Microeconomics, in other words, tries to understand human choices and decisions as well as the allocation of resources.
Microeconomics doesn’t try to explain or answer what forces should be present in a market. It focuses on explaining what happens to certain conditions when they change.
Microeconomics, for example, examines how a company can maximize its production and capabilities to lower prices and be more competitive. Financial statements can provide a lot of information about microeconomics.
Microeconomics is based on several core principles, including but not limited to:
Supply, Demand, and Equilibrium: The law of supply-demand determines the prices. In a highly competitive market, suppliers will offer consumers the same price as they want. This creates an economic equilibrium.
Production Theory – This principle studies how goods and services are made or created.
Costs of production: This theory states that the price of goods and services is determined by how much it costs to produce them.
Labor Economics This principle examines workers and employers and attempts to understand patterns in wages, employment, income, and other economic factors.
Instead of starting with empirical research, the rules of microeconomics are based on a collection of compatible laws and theorems.
Macroeconomics
Macroeconomics studies the economic behavior of a country as well as how it affects the economy. Macroeconomics analyzes whole industries and economies rather than individual companies or individuals. It attempts to answer questions like “What is the right rate of inflation?” and “What stimulates economic growth?”
Macroeconomics studies economy-wide phenomena like gross domestic product (GDP), and how they are affected by changes in unemployment rates, national income, growth rates, and price levels.
Macroeconomics examines the impact of net exports on a country’s capital account or how unemployment affects gross domestic product (GDP).
Macroeconomics is focused on aggregates and econometric correlations. This is why governments and agencies rely heavily on macroeconomics when deciding on fiscal and economic policy. Investors who buy interest-rate-sensitive securities should keep a close eye on monetary and fiscal policy.
John Maynard Keynes, who invents monetary aggregates for studying broad phenomena, is often credited with the birth of macroeconomics. While some economists disagree with his theories, many Keynesians disagree about how to interpret his work.
Investors vs. Microeconomics
Individual investors might be better off focusing their attention on microeconomics. However, macroeconomics should not be overlooked. Technical investors and fundamental investors might disagree about the proper role of economic analysis. Although it is more likely for microeconomics to impact individual investments, macroeconomics can have an effect on entire portfolios.
Warren Buffett once stated that macroeconomic forecasts did not influence his investing decisions. Buffett and Charlie Munger were asked about their investment decisions. Buffett replied, “Charlie and me don’t pay much attention to macroeconomic forecasts.” Since we have been together for 54 years, I don’t recall a time when we didn’t make a decision about a stock or company.
1 Buffett has also called macroeconomic literature “the funny papers”.
2 John Templeton was another well-known value investor who shared the same sentiment. Templeton stated to Forbes that he never asked if the market would go up or down because he didn’t know and it didn’t matter. “I look for stocks in every country and ask: ‘Where is it that is least expensive relative to what I think it’s worth?”
How can macroeconomic factors affect my investment portfolio?
Yes, macroeconomic factors have the potential to significantly impact your investment portfolio. The 2008-09 Great Recession and its accompanying market crash, as well as the burst of the U.S. mortgage bubble, and the subsequent near-collapse in financial institutions heavily invested in U.S. Subprime Mortgages, were examples of macroeconomic factors.
Another example of the impact of macro factors on investment portfolios is the response of governments and central banks to the spring 2020 pandemic-induced crash. To prop up their economies, central banks and governments unleashed floods of liquidity via fiscal and monetary stimulus. This had the effect that most major equity markets reached record highs in the second quarter of 2020 and much of 2021.
What is a Global Macro Strategy?
A global macro strategy refers to an investment and trading strategy that is centered on large macroeconomic events at either a national or global scale. Global Macro involves the analysis and research of many macroeconomic factors such as interest rates, currency levels, and country relations.
What is the basic difference between microeconomics and macroeconomics?
Microeconomics studies how companies and individuals allocate scarce resources. Macroeconomics refers to the study of an entire economy.
What Does the Core Concept of Microeconomics, Supply, and Demand, Have to Do with Stock Prices?
Stock prices are affected by microeconomic concepts like supply and demand in two ways.
You can gauge the direct impact of supply and demand disequilibrium on stock price prices. The stock will rise if there is more demand than supply, which happens when there are more buyers than sellers. Conversely, if there is more supply than demand, the stock price will drop.
The indirect effect depends on the supply and demand of the underlying company’s products and services. A company’s products selling well due to strong demand may have a strong earnings track. This would likely lead to a higher stock price. If demand is low and inventory is in excess, then earnings could be disappointing and stock prices may plummet.
Is my Portfolio Performance affected by both Macroeconomic and Microeconomic Factors?
Yes, both macroeconomic and microeconomic factors are important in determining the portfolio’s performance. Both macroeconomic factors, such as supply and demand, taxes, regulations, and growth, as well as macroeconomic factors like gross domestic product (GDP), inflation, and interest rates have an important influence on various sectors of the economy, and thus on your investment portfolio.
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