Macroeconomics is a category of economics that deals with the behavior of the aggregate economy (Mankiw 96). The behavior of a given economy is looked into under a variety of economic phenomena such as price levels, inflation, growth rate, national income, changes in employment and gross domestic product. Macroeconomics is mainly concerned with trends in the economy and and its general development. Macroeconomics differs from microeconomics since microeconomics deals with small factors that affect desicion-making of individuals and businesses.
Macroeconomics takes its origins from the book General Theory of Employment, Interest, and Money by John Maynard Keynes, in the year 1936. The author explained the reasons for the fallout from the Great Depression, when goods and services were unsold, and many people were unemployed, an aspect that left many economists stranded (Mankiw 87). His theory evolved in the 20th century and tried to explain why the markets may not be clear. This approach led to the diversion of many macroeconomic schools of thought referred to as Keynesian economics or Keynesian theory.
Macroeconomics is involved in the development of models that explain the relationship between a variety of economic factors such as international trade, inflation, national income and output among others (Salman 51). The models are used by governments in forecasting as an aid to evaluation and construction of economic policies in an economy. Macroeconomics involves the process of understanding the repercussions of short-term fluctuations in the business cycle also known as the national income and understanding factors that determine the long-term economic growth or increase in the level of national income.
Macroeconomics involves a variety of variables that revolve around the phenomena of unemployment, inflation, and output. The topics are not only relevant to the macroeconomic theory but also to the workers, producers, and the consumers who are usually referred to as economic agents. The macroeconomic variables are discussed below.
Output and Income
The national output of a country is the inclusive sum of all the products produced by a country in a certain duration of time, while national input is all the amount generated by the sale of the goods created by a country (Salman 118). Therefore, national income and output are the same and can be used interchangeably since income can be measured as the total revenue or as the full value of the final goods and services in an economy.
Macroeconomic output can be measured by the Gross Domestic Product by those economists who are interested in the study of economic growth. Factors such as advancement in technology, better education, human capital, and machinery all lead to an increase in national output over a duration of time. However, it is not a must for economic output to increase consistently since other factors result in short term drops in the output, called inflation. Therefore, economists are always involved in macroeconomic policies that deter the economy from falling into recessions and those that lead to rapid and long-term economic growth.
The employment rate is used in the measurement of the levels of unemployment in an economy. The level of unemployment in the labor force only includes those individuals who are in need of finding a job but not those that are retired, pursuing education or have already surrendered on seeking a job.
Unemployment thus can be classified into types based on the causes that have led to the unemployment. The types include classical unemployment, which occurs when the wages are too high such that employers cannot afford to hire more workers. The second type of unemployment is the fractional unemployment, which occurs when the available job vacancies are appropriate for an employee but the time involved in looking for the job leads to a period of unemployment. The other type of unemployment is the structural unemployment, which occurs when workers lack the required qualifications to be offered a job (Salman 130).
Inflation and Deflation
Inflation is the general increase in prices in a given economy, while deflation is the general decrease in prices. The changes are measured by economists using the price indexes. Inflation occurs when an economy grows so fast such that it becomes overheated, while deflation takes place in cases where the economy declines (Salman 140).
Inflation and deflation are controlled by the use of monetary policies that are applied by the government through central banks so as to avoid changes in prices. This is made possible by increasing the interest rates or reducing the supply of money to the economy. Such measures are taken because inflation can lead to an increase in uncertainty as well as other adverse effects on the economy, while deflation is accountable for lowering the economic output of an economy.
To stabilize the economy, some macroeconomic policies are employed through two sets of tools which are the fiscal and monetary policy. Maintaining the economy by use of these two tools aims at pushing the economy to levels where the GDP is consistent with full employment. Monetary policies are used by central banks to control the supply of money in an economy by use of mechanisms such as issuing money to buy bonds so that the money supply to an economy can be boosted to lower the prevailing interest rates. Banks may also sell the bonds and withdraw the money from circulation in case of a contractionary monetary policy (Carlin et al. 38).
On the other hand, a fiscal policy involves using the governments income and expenditure as the tools to impact the economy. Such tools include expenses, taxes, and debts. An example of this is when an economy is producing less than the expected output, the government can engage idle resources so that the output can increase, although the government expenditure does not have to cover up the whole output gap (Carlin et al. 47). An example is when the government pays for the construction of a road at a particular place in the country, the project does not only add the value to the road output but also allows those using it to increase their investment and consumption thus, closing the output gap.
When the government spends on a project, there is a limitation on the amount of the available resources to be used by the private sector. This is commonly known as crowding out and occurs when the private sector output is replaced by the government spending instead of adding up supplementary output to the economy. It also happens when the interest rates are raised by the government with the aim of limiting the level of investment (Carlin et al. 60). However, automatic mobilizers can be used to implement fiscal policies since they hardly suffer from the discretionary fiscal policy lags. They employ the conventional economic mechanisms but take effect immediately the economy takes a downturn.
In conclusion, macroeconomics deals with the structure and performance of the whole economy. It involves a variety of variables that revolve around the phenomena of unemployment, inflation, and output and is an important field of study when making financial decisions and predictions.
Carlin, Wendy, and David W. Soskice. Macroeconomics: Imperfections, Institutions, and Policies. Oxford: Oxford University Press, 2006. Print.
Mankiw, N G. Macroeconomics. New York: Worth Publishers, 2007. Print.
Salman, A K. A Macroeconomics Model and Stabilisation Policies for the Opec Countries: With Special Reference to the Iraqi Economy. Aldershot: Ashgate, 1999. Print.
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