There are a lot of questions that we
have in mind on why other countries experienced rapid growth in incomes over
the past decades, while others are lagging behind and experienced severe
poverty. There are other countries that have very high prices while others
maintain stable prices. Why do we experience recessions and
depressions—recurrent periods of falling incomes and rising unemployment—and
how can government policy reduce the frequency and severity of these episodes?
Macroeconomics, the study of the economy as a whole, attempts to answer these and many related questions.
Macroeconomics is an important branch in
economics. Apart from studying the economy as a whole, it also analyzes how
economic agents as a whole react to variations in the economic environment. It
also studies how their action feedback on the economy. It focuses on the
determinants of total national income, deals with aggregates, such as aggregate
consumption and investment, and looks at the overall level of prices instead of
individual prices. In a nutshell, macroeconomics deals with the key economic
issues and problems of the day. In order to understand these issues, we have to
reduce the complicated details of the economy to manageable essentials. Those
essentials lie in the interactions among the goods, labor, and assets markets
of the economy and in the interactions among national economies that trade with
each other.
Balance in the macro economy is
monitored through the three major concerns in the aggregate economy; inflation,
output growth and unemployment. Inflation talks about the increase in the
overall price level of goods and services in the economy. Inflation is a major
concern in macroeconomic balance, since its erratic movement (rapid increase
and decrease) affects consumption, savings, investment and aggregate demand. Output growth on the other hand, pertains to
the total value of final goods and services produced in the domestic economy
(Gross Domestic Product) and by the citizens of the country (Gross National
Product). The analysis of output growth can be the expansion of output in the
economy in the long-run (Economic Growth) or the cycle of short-term ups and
downs in the economy (Business Cycle). Meanwhile, unemployment rate pertains to
the large portion (percentage) of the labor force that is employed.
Macroeconomic balance as the basic
concept of modern economics is the major basis for decision making of government
policy makers who would like to have low inflation, high output growth and low
unemployment rate. Government has a crucial and important role because they
enact policies that used to influence the macro economy. They imposed
government policies concerning taxes and expenditures (Fiscal Policy).
Government can cut taxes and/or raise spending to get out of a slump
(Expansionary Fiscal Policy) or they can raise taxes and/or decrease spending
to bring the economy out of inflation. Central Banks can control the quantity
of money in circulation (Monetary Policy). Meanwhile,
contractionary monetary refers to
the decrease in the quantity of money in circulation, with corresponding
increases in interest rates, for the expressed purpose of putting the brakes on
an overheated business cycle expansion and to address the problem of inflation.
Finally, supply side policies are government policies that focus on stimulating
aggregate supply instead of aggregate demand. Therefore, in order to attain the
macroeconomic balance, government should lead the direction of growth in the
economy. But this is not possible without the households (people who consume),
firms (who invest) and the foreign sector (partners in foreign trade). The four
sectors are very important in the circular flow of payments and income in the
modern economy.
References:
Case,
Karl. et al. Principles
of Economics . Prentice Hall, 2011.
Mankiw,
Gregory. Macroeconomics. Worth Publishers, 2002.
Samuelson,
Paul and William Nordhaus. Economics. McGraw-Hill Education, 2009.
