Before the 1930s Great Depression in the US, economists did not widely distinguish between the economy as a whole and how people and businesses make decisions on a smaller scale. It was simply ‘economics’ - the study of how human societies organise the production, distribution, and consumption of goods and services.
However, as the theory has evolved over time, the distinction between the economy as a whole and the influencing factors within it – known as macro and microeconomics respectively – are now institutionalised, individual disciplines within economic theory.
Macro and micro are not the only subfields within economics. Econometrics, which seek to apply statistical and mathematical methods to economic analysis, is widely considered the third core area.
Where microeconomics is concerned with individual units in the economy, such as a consumer or company, macroeconomics is an aggregate analysis of the economy as a whole. Econometrics uses mathematics and statistical inference to turn theoretical economic models into useful tools for policy making.
All three play a key role in strategic decision and policy making within banking and finance. Let’s take a look a closer look at how:
The big picture
Macroeconomic theory uses a top down approach, which facilitates the understanding of the overall economic framework in which countries and governments operate.
Macroeconomic analysis is used to craft economic and fiscal policy and is applied to many areas, including the labour market, monetary theory and central banks objectives.
Having a holistic view of the economy is incredibly important as it provides broader context for strategic decisions and enables a clear understanding of topical issues such as economic growth, sustainability of pensions, optimal taxation, unemployment and banking regulation.
Of course, the global economy does not exist in a vacuum – it is influenced by numerous factors. Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources and the prices of goods and services. It also takes into account taxes, regulations, and government legislation. Often referred to as behavioural economics, it provides an understanding of the role of personal and business decisions in evaluating potential outcomes.
A strong background in microeconomic theory is extremely valuable for professionals in banking and finance as it provides in-depth insight into market failures and government policies in various socio-economic realms. It also enables the interpretation of equity and distributional issues as well as the ability to provide social-economic analysis of the market equilibrium and define possible policy interventions.
In addition, microeconomic theory is commonly used when evaluating investment opportunities as it focuses on supply and demand, and other forces that determine price levels.
The role of econometrics
According to Sam Ouliaris, Senior Economist in the IMF Institute, “Econometrics uses economic theory, mathematics, and statistical inference to quantify economic phenomena. In other words, it turns theoretical economic models into useful tools for economic policymaking. Without evidence, economic theories are abstract and might have no bearing on reality (even if they are completely rigorous). Econometrics is a set of tools we can use to confront theory with real-world data.”
Econometrics and econometrics software are used widely in the banking and finance sectors, for example to measure returns and risks of financial assets, set interest rates and premiums and for credit risk management.
“By having a strongly applied focus and a solid grounding in economic theory, you will be prepared to face diverse challenges and environments ranging from financial trading rooms to policy making institutions.”
— Dr. Simona Montagnana
Put economic theory into practice
A deep understanding of economic theory coupled with its practical application enables you to make sound, strategic and financially beneficial decisions.
Our Applied Economics (Banking and Financial Markets) online MSc enables students to use the insights gained from economic theory and research to make better decisions and solve practical problems. By cutting away the abstract ideas and positioning economics firmly in the real world, we help you to apply advanced economics in your chosen field.
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