Essay Example on Macroeconomics

Macroeconomics is a category of economics that deals with the behavior of the aggregate economy (Mankiw 96). The behavior of the 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 the trends in the economy and how it moves generally. When compared to microeconomics, it defers with since microeconomics deals with the small factors that affect how individuals and firms make choices.

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Macroeconomics has its origin in the publication of a 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 in forecasting by the government 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 phenomenas of unemployment, inflation, and output. The topics are not only relevant to the macroeconomic theory but also to the workers, producers, and the consumer 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, income and national 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 an 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.

Unemployment

The employment rate is used in the measurement of the levels of unemployment in an economy. This is by looking at the number of people without jobs and are eligible to be in the workforce of the nation. The level of unemployment in the labor force only includes those individuals who are actively in need of jobs but not those that are retired, pursuing education or have already surrendered on seeking a job.

With this, unemployment can be classified into some types as a result of the causes that have led to the unemployment. The types include classical unemployment that 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 that 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 that occurs when the workers lack the required qualifications to be offered a job (Salman 130).

Inflation and deflation

Inflation is the general increase in general prices in a given economy while deflation is the general decrease in general prices. The changes are measured using the price indexes by economists. Inflation occurs when an economy grows so fast such that the economy 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 the 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. This is because inflation can lead to increase in the uncertainty as well as other adverse effects to the economy while deflation is responsible for lowering the economic output of an economy.

To stabilize the economy, some macroeconomic policies are employed through two set of tools that is the fiscal and monetary policy. Maintaining the economy by use of these two tools aims at push the economy to levels where the GDP is consistent with full employment. Monetary policies are used by the central banks to control the supply of money in an economy by use of a mechanism such as issuing money to buy bonds so that the money supply to an economy can be boosted and lower the prevailing interest rates. Banks may also sell the bonds and withdraw the money from circulation in case of contractionary monetary policy. Central banks aim at achieving high levels of output without losing the monetary policy that helps in the creation of large amounts of inflation (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 the 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 adds the value to the road output but also allows those using the bridge 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 also 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.

References

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.