It is already apparent from this brief overview that the subject of economics is a very broad one. Just as the study of the physical world is divided into fields such as physics and chemistry, economics is likewise divided into fields comprised of closely related topics. The two major fields of economics are micro economics and macro economics. Since the second is the subject of this book, let's take a minute to review what microeconomics is about.
Modern complex economies involve the interactions of large numbers of people and organizations. These economic agents fall into one of three categories: business, households, government, and the rest-of-the-world. Economists find it useful to think of these groupings as sectors of the economy. Let's look at each of these sectors in turn:
Economics is one of the oldest and most influential of intellectual disciplines. Practically all of the great thinkers, from Aristotle to Einstein, have tried their hand at it, and the great economists like Adam Smith, Thomas Malthus, David Ricardo, John Maynard Keynes and Milton Friedman rank among the most influential minds in our history. The economic paradigm permeates our thinking about practically every area of human activity. Military analysts talk in terms of “assets” and “trade offs” while theologians quote economic statistics. Adam Smith’s ideas about competition had a strong influence on Charles Darwin’s study of biology. Insect colonies are said to “invest” in nest building. Our thinking about politics and social behavior draws heavily on ideas about incentives, trading, and maximization that come from economics.
Because of the importance of understanding the status of the economy today to be able to predict the future, not all indicators need to be leading the economy. This means that not all indicators included in the approach will have strong predictive abilities. But as this is a forecasting approach, the assessment of the different indicators will always point towards their possible implications for the future.
Even though the different business cycles can be described through relatively simple models such as the one explained in section (U.S. business cycles), the underlying reasons for the developments and the amplitude of the business cycles seems to be changing with each cycle. Wesley Clair Mitchell who was one of the early researchers of business cycles and leaders of NBER stated that; “since each business cycle in a sense is unique, a thoroughly adequate theory of business cycles, applicable to all cycles is unattainable” (Dua 2004, Page 1). This suggests the need to take a broad set of factors into consideration when analyzing the state of the economy and when trying to forecast the future developments of the macro economy.