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Issues in Macroeconomics


Macroeconomics concerns with the behavior of the economy as a whole, with booms and recessions, the economy's total output of goods and services and the growth of output, the rates of inflation and unemployment, the balance of payment and exchange rates. It deals with both long-run economic growth and short-run fluctuations that constitutes the business cycle.
Macroeconomics focuses on the economic behavior and policies that affect consumption and investment, balance of trade, the determinants of changes in wages and prices, monetary and fiscal policies, money stock and national budget, interest rates and national debt. In brief, Macroeconomics deals with the major issues of the economy. There are some such macroeconomic issues which are described as given here.

1- Unemployment
Unemployment is a macroeconomic issue that most of the countries in the world facing greatly. Unemployment refers to that part of the total resources including labor force in the economy which is willing to work at prevailing factor prices and seeking a job but not getting employment. Hence, the issue in macroeconomics is to explain what causes involuntary unemployment in the economy and how the level of income and employment can be increased to its expected level.

Historical evidences of economics in the past have revealed that the rate of unemployment goes up with economic recessions in which GDP as well as the living standard of the people decline. It has been also proved from the evidences that the monetary as well as fiscal policies sometimes fail to bring down the unemployment  to its expected rate due to the change in various interconnected variables like availability of resources, economic growth rate, capital formation, change in size of population, private investment, government expenditure, money supply, technological changes, deficiency in aggregate demand etc. These variables bring fluctuations in aggregate demand which often causes cyclical unemployment.

As the classical view, on the problem of unemployment, is shelf-correcting in the long run, failed at the time of depression in 1930s, Keynes' view of increasing aggregate demand had assisted to heal the economic problem of employment. Keynes has advocated that a deficiency in aggregate demand leads to an involuntary unemployment due to change in private investment with constant aggregate supply in short-run. He has pointed that change in private investment is responsible for a cyclical unemployment. Now the question may rise, why  can not the private investment be stopped from being changed to eliminate the problem of unemployment? There is a simple answer that the investment is also influenced directly or indirectly by many other variables like level of income, growth rate, size of physical and human capital stock, productivity of factors and many other variables. The short-run variation in these these variables can not be predetermined so as to handle the problem of unemployment properly through the economic policy. Therefore, the problem of unemployment has been a macroeconomic issue for a long period of time.

2-Economic Growth
One of the macroeconomic issues that policy-makers concentrate is how to attain a sustained increase in real gross national product or per capita income sufficiently over a long period of time. In fact, it is a matter of great concern of achieving and maintaining a high rate of economic growth for both developed and developing countries. This is often seen as a very important target for governments as well. It is because, with an increase in income in the economy, people can afford sufficient goods and services and many have a better quality life.

A sustained increase in real GDP is affected by various determinants like availability of natural resources, technological progress, physical and human capital stocks, productivity of factors, consumption, investment, political environment international trade etc. The short term impact of the determinants on an economy can not be predetermined properly by the policy makers as well as the governments, especially in free market economies. For instance, changing consumption pattern of consumers, technological progress, unfavorable political environment, cultural and religious traditions etc. are the determinants whose magnitude of change can not be well predetermined. These factors usually bring short-run fluctuations in the economy. As a result, the expected rate of economic growth, sometimes can not be achieved even if sound fiscal and monetary policies are formulated and implemented by the policy makes in the economy. Thus, economic growth for a long period of time has been an issue for underdeveloped countries as how to attain high economic growth rate and for developed countries as how to maintain existing rate of growth.

It is not untrue that there are economic growth related theories and models presented by economists that explain the causes of failures for achieving high economic growth rate and present the modality of policies and strategies that accelerate economic growth over time. With these theories and models the policy makers formulate monetary and fiscal policies to achieve the expected rate of economic growth in the economy but the target can not be met fully all the time.

3 - Inflation
Inflation is another macroeconomic issue faced by the counties at different point of time, especially by the fast growing economies. Inflation is defined as a persistent and considerable increase in the price level over a long period of time. A moderate rate of inflation is considered to be desirable for the economy. Inflation, in excess of the moderate rate, is economically and socially undesirable and rather harmful for the economy.

Classical economists thought that it was an increase in quantity of money supply which is responsible for inflation but Keynes did not believe it. He thought that an excessive increase in aggregate demand which causes a rise in the price level and results inflation. In this regard, he has developed a theory of inflation named 'Demand-pull inflation'. There are other theories of inflation developed after Keynes, One of them is 'Cost-push inflation'. Either inflation is caused by demand-pull or cost-push, it creates social and political, economic problems in the economy. Therefore inflation is considered to be a serious macroeconomic issue requiring the formulation of sustainable policy measures and effective implementation of the policy for controlling price-rise and maintaining inflation at a reasonable level.

4- Business cycle
Business cycle refers to the high magnitude of fluctuations in the economy with a higher growth in output and employment in one period followed by a decline in them in the next period. Thus, business cycle is also referred as a period of economic boom and depression. The period of prosperity and boom in the economy lead to an increase in output and employment and on the contrary the period of depression a faster decline in the both. The recurrence of this kind of fluctuations in the economy is called business cycle. During recession, many businesses go bust, while profits fall for the survivors. In contrast during a boom aggregate demand goes high, profit margin of firms also rises and most of the business firms find easy to expand. Therefor understanding the business cycle is important for getting succeeded in business. Most importantly, such economic fluctuations are out of the control of individual firms yet the firms do need to understand that the economy moves in cycles. The policy makers claims that their policies would bring stable growth and the end to cycles but business cycles have been around for a long time. This shows that the fluctuations in the economy is also an important macroeconomic issue.

5- Balance of payment and exchange rate
Balance of payment is a systematic record of country's trade in goods, services and financial assets with rest of the world in a specific period of time. The balance of payment records information about all the economic transactions  of a country such as exports, imports, earnings by domestic residents on assets located abroad, earnings of domestic assets owned by foreign residents, international capital flows etc. The general notion is that the economic transactions of a country with foreign countries should be in balance but it is rarely found to be like that in general. There may be deficit or surplus in balance of payment. These two situations create a problem for an economy.

An important thing is to be noted here that the transactions in balance of payment are affected due to an instability in foreign exchange rate or the rate at which a country's currency is exchanged for foreign currencies. The instability in foreign exchange rate very often create imbalances in balance of payments. In fact, it is a serious problem related to the transactions of a country with other countries. Hence, it has been a macroeconomic issue for the policy makers to find out the causes and effect of imbalances in receipts and payments.

6- Stagflation
Stagflation is quite simply the simultaneous occurrence of high rate of inflation and unemployment. Until 1970s, stagflation was unknown to the developed nations of the world. These countries either experienced high inflation and low unemployment or high unemployment and low inflation. Moreover, whenever inflation increased unemployment would normally fall and vice-versa. Economists even thought that stagflation was impossible because inflation and unemployment were mutually exclusive alternatives. Inflation was the result of too much demand while unemployment was the result of too little demand. This trade-off was expressed on the notion of Phillips curve, which depicted unemployment and inflation as being inversely related. As the notion of inverse relationship between unemployment and inflation did not work the term stagflation was coined in 1970s to denote the new economic reality, the conjunction of economic stagnation (leading to high unemployment rate) and high inflation. Thus, stagnation is the result of a fall aggregate supply of goods and service that is due to higher business cost resulted an increase in unemployment. Such a situation of stagflation is also possible to occur in the economy. So it is also taken as a macroeconomic issue.




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