Macroeconomics

What is Macroeconomics?

• Macroeconomics is the branch of economics concerned with the overall structure, performance, behaviour, and decision-making of the economy. It usually simplifies the analysis of how the country’s total production and the level of employment are related to different aspects like prices, rate of interest, wage rates, profits, etc.
• Macroeconomics is a broad field, but two specific areas of research are representative of it which are –
• The factors that influence long-term economic growth or increases in national income.
• The causes and consequences of short-term fluctuations in national income and employment, also referred to as the business cycle.
• Goals of Macroeconomics is to maximize the standard of living and achieve stable economic growth. The goals are supported by objectives such as minimizing unemployment, increasing productivity, controlling inflation, and more.

Microeconomics vs Macroeconomics

• The study of economics at the individual, group, or company level is known as microeconomics. It is concerned with issues that affect individuals and businesses.
• Macroeconomics, on the other hand, is the study of a country’s economy as a whole. It is concerned with issues that affect nations and the global economy.
• Macroeconomics is concerned with the overall performance, structure, and behaviour of the economy, as opposed to microeconomics, which is more concerned with the choices made by individual actors in the economy. Understanding macroeconomics helps in measuring the growth and development parameters and designing policies accordingly.

The Emergence of Macroeconomics

• Macroeconomics developed as a discrete subject in the 1930s due to John Maynard Keynes, a British economist.
• The classical school of thought, before Keynes, believed that all the labourers who are ready to work will find employment and all the factories will be working at their full capacity.
• However, the Great Depression of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amount which affected other countries of the world as well.
• Demand for goods in the market was low, many factories were lying idle, workers were thrown out of jobs and the unemployment rate touched new heights.
• These events led to the persistent development of macroeconomic frameworks explained by Keynes.
• His approach was to examine the working of the economy in its entirety and examine the interdependence of the different sectors.

Macroeconomic Schools of Thought

• The field of macroeconomics is organized into many different schools of thought, with differing views on how the markets and their participants operate.

Classical

• • It is based on Adam Smith’s original theories.
  • Classical economists held that prices, wages, and rates are flexible and markets tend to clear unless prevented from doing so by government policy.

Keynesian

• • Keynesian economics was mainly based on the works of John Maynard Keynes. Keynesians focus on aggregate demand as the principal factor in issues like unemployment and the business cycle.
  • According to this theory, the business cycle can be managed by active government intervention through fiscal policy, where governments spend more in recessions to stimulate demand or spend less in expansions to decrease it.
  • It also believe in monetary policy, where a central bank stimulates lending with lower rates or restricts it with higher ones.

Monetarist

• • The Monetarist school is a branch of Keynesian economics credited mainly to the works of Milton Friedman. 
  • Working within and extending Keynesian models, Monetarists argue that monetary policy is generally a more effective and desirable policy tool to manage aggregate demand than fiscal policy.

New Classical

• • The New Classical School, along with the New Keynesians, is mainly built on integrating microeconomic foundations into macroeconomics to resolve the glaring theoretical contradictions between the two subjects.
  • New Classical economists assume that all agents try to maximize their utility and have rational expectations, which they incorporate into macroeconomic models. New Classical economists believe that unemployment is largely voluntary and that discretionary fiscal policy destabilizes, while inflation can be controlled with monetary policy.

New Keynesian

• • The New Keynesian School also attempts to add microeconomic foundations to traditional Keynesian economic theories. 
  • While New Keynesians accept that households and firms operate based on rational expectations, they still maintain that there are a variety of market failures, including sticky prices and wages. Because of this “stickiness,” the government can improve macroeconomic conditions through fiscal and monetary policy.

Concepts under Macroeconomics

A capitalist nation

• • A capitalist nation is identified by sub urbanized and voluntary economic planning conclusions instead of consolidated political practices.
  • The characteristics of a capitalist nation include:
  • Customers’ freedom to choose between goods and services.
  • The right of individuals to establish a business to provide goods and services.
  • The government’s interference is limited.
  • The distribution of goods is governed by market forces.

Investment Expenditure

• • Investment Expenditure is the money spent on charges to create investments. In other words, it is the money spent on capital goods by households and businesses.
  • It is critical in the macroeconomic pursuit of business cycles and long-term economic growth.
  • In short, investment expenditure is capable of generating additional income and promoting employment in a country.
  • The various types of investments are:
  • Autonomous investment
  • Financial investment
  • Real investment
  • Gross investment
  • Net investment

Revenue

• • Revenue means an entity’s total income from the sale of goods and the provision of services to customers.
  • Revenue can be classified as operating or non-operating.

Factor Income

• • It is the income earned by factors of production in exchange for their productive services in the production process
  • It is included in National Income as it contributes something to the flow of goods and services

Transfer income

• • It is income obtained without the provision of any productive services
  • It is excluded from the national income since it has no impact on the flow of goods and services

Stock

• • Stock is an economic variable that is calculated at a specific point of time
  • It has a static nature, which means it does not change

Flow

• • Flow refers to any economic variable that is calculated over a period of time.
  • It has a dynamic nature, which means it can change.

Macroeconomic Indicators

The macroeconomics is best represented by two particular areas, namely –

Economic Growth

• The first area is what influences long-term economic growth or rises in the level of the national income.
• Economic growth refers to an increase in aggregate production in an economy. Macroeconomists try to understand the factors that either promote or retard economic growth to support economic policies that will support development, progress, and rising living standards.
• To measure economic growth and performance, economists use numerous indicators that basically fall under 10 categories.
  • Gross Domestic Product indicators: Measure how much the economy produces
  • Consumer Spending indicators: Measure how much capital consumers feed back into the economy
  • Income and Savings indicators: Measures how much consumers make and save
  • Industry Performance indicators: Measures GDP by industry
  • International Trade and Investment indicators: Indicates the balance of payments between trade partners, how much is traded, and how much is invested internationally
  • Prices and Inflation indicators: Indicate fluctuations in prices paid for goods and services and changes in currency purchasing power
  • Investment in Fixed Assets indicators: Indicate how much capital is tied up in fixed assets
  • Employment indicators: Shows employment by industry, state, county, and other areas
  • Government indicators: Shows how much the government spends and receives
  • Special indicators: All other economic indicators, such as distribution of personal income, global value chains, healthcare spending, small business well-being, and more.

The Business Cycle

• The second focuses on the factors that contribute to and are affected by short-term changes in employment and national income, generally referred to as the economic cycle.
• The business cycle is measured by the National Bureau of Economic Research (NBER), which tracks the cycle using GDP and Gross National Income.
• The levels and rates of change of significant macroeconomic variables such as employment and national output go through fluctuations. These fluctuations are called expansions, peaks, recessions, and troughs. When charted on a graph, these fluctuations show that businesses perform in cycles; thus, it is called the business cycle.

How Does the Government Influence the Macro economy?

• Because macroeconomics is such a broad area, positively influencing the economy is challenging and takes much longer than changing the individual behaviours within microeconomics. Therefore, economies need to have an entity dedicated to researching and identifying techniques that can influence large-scale changes.

Monetary Policy

• Implemented by central banks, monetary policy is an action that influences money supply and interest rates. The central bank can set interest rate targets for direct results. Money supply also affects the interest rate, with increased supply usually lowering interest. As previously mentioned, interest rates influence consumer consumption and investment. There are two types of monetary policy:

Expansionary Monetary Policy

• In times of economic slump, the government can encourage economic growth by implementing an expansionary monetary policy. They purchase securities from the open market and ease reserve requirements to increase the money supply, and on the other hand, lowering the interest rate target.

Contractionary Monetary Policy

• In economic booms, high inflation rates in the long term can spell trouble by reducing purchasing power. To cool down inflation, the government can decrease the money supply and increase interest rates by selling securities on the open market, tightening reserve requirements, and increasing the interest rate target.

Fiscal Policy

• The government implements fiscal policy through spending and taxes to guide the macroeconomy. Government spending influences job creation and infrastructure improvements, which, in turn, affects money in circulation. Taxes affect consumer disposable income. Fiscal policy is also segmented into two types:

Expansionary Fiscal Policy

• To increase inflation, governments increase spending to increase money in circulation or cut taxes, so consumers have more money to spend.

Contractionary Fiscal Policy

• To ease inflation, governments decrease spending to reduce money in circulation or increase taxes. As a result, less money is available for consumers to spend.

Significance of Macroeconomics

• Maintain Price Stability & Address Major Economic Issues: Macroeconomics helps to maintain price stability and addresses major economic issues such as deflation, inflation, rising prices (reflation), unemployment, and poverty in general.
• Examines the performance of the Economy: Macroeconomics focuses on how the economy as a whole performs and then examines how different sectors of the economy interact with one another to understand how the aggregate functions.
• Helps Individual Businesses and Investors: Macroeconomic theory can also assist individual businesses and investors in making better decisions by providing a more comprehensive understanding of the effects of broad economic trends and policies on their respective industries.
• Studies the Government: In macroeconomics, the government is a major subject of study, for example, the role it plays in contributing to overall economic growth or combating inflation.
• Also Covers International Spaces: Since domestic markets are linked to foreign markets through trade, investment, and capital flows, macroeconomics frequently extends to the international sphere.

 

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