This article highlights the area of macroeconomics. Specifically, the basic concepts of macroeconomics including economic growth, unemployment, inflation and trade balance. It also explains economic policies and describes the main economic policy instruments.
What is macroeconomics?
Macroeconomics is the study of both the national economy and world economies. The subject deals with growth, inflation, unemployment and with national economic policies relating to these issues.
Macroeconomics is useful to both governments, business owners, managers and investors as it gives an indicator about the current state of the economy as well as individuals and companies that the economy is made of. Is the economy doing well or poorly?
Like all aspects of economics, comparisons can be made between different years and different national economies to establish rates of success or failure. When measuring a whole economy, the level of output is considered as a primary indicator of success. It is because output can be used to show how effectively and efficiently (productively) scarce resources are being used. When the resources are well used, it should equal more products being produced.
Governments are the ‘managers’ of an economy, so they have aims and goals which they strive to achieve. These goals cover:
- Economic growth.
- Unemployment.
- Inflation.
- Trade balance.
These are the four factors that can be reviewed in order to determine, if government policy has been successful.
Let’s describe further the main indicators of economic performance policy.
1. Economic growth
Economic growth is used as an indicator of the development of an economy and is measured using percentages (%). Growth is desired since people have unlimited wants to fulfill – higher output produced means that more can be consumed. However, governments must be careful to manage this consumption and output because economic growth is determined in many ways by the ‘business cycle’.
The business cycle dictates that all economies will experience growth and decline over time. It is the duty of governments to ensure that the ‘damage’ caused during times of difficulty is at a minimum. As you will see later, they do this by supporting society’s needs and providing investment, either directly through government spending, or by giving firms and individuals the opportunity to invest for themselves.
2. Unemployment
All governments have policies to enable as many people as possible to be able to work. There are of course people who are not considered to be a part of the national workforce – this is dependent upon government policy.
For example, the UK workforce is made up of people aged between 16 and 65 (not including people in full-time education). Retirement policies are often under review by many governments, so reality may differ from the examples.
Those who are considered to be within the working age, but not in employment, are not contributing to producing output – they are a wasted resource according to macroeconomics. People who are unemployed risk poverty and may face a lower standard of living.
Low unemployment is not only important for the well-being of individual members of the society, but also for economic growth – wasting resources such as labour slows down the growth. A growing economy will experience a greater need for workers, thus causing lower unemployment. However, a paradox may exist between economic growth and unemployment. That is, as an economy grows, so should its level of technological development.
As technology becomes cheaper and more widespread, there will be a decrease in the amount of labour which is required for production. The result is that economic growth is still possible with less people. Manufacturing is usually the industry which is hit the most, as tasks are simplified carried out by machines. The service sector should experience growth as the growing economy creates a greater need for luxuries and complimentary services.
3. Inflation
Inflation is the gradual increase of prices in an economy over time. Low inflation is better since it is viewed as more stable and is reassuring for investors and consumers.
Consumer power is dependent upon knowledge of the market. Rapidly changing prices remove knowledge, therefore power, and ultimately confidence. Failing confidence in the market will see a reduction in consumer expenditure resulting in slower or even negative economic growth.
It is a commonly held view that an inflation rate of 3% or less is acceptable. However, in more recent times some governments have made their inflation targets even lower.
Inflation cannot be stopped. As an economy grows people earn more and therefore spend more. As demand increases, higher prices can be charged by the firms.
Governments seek to control inflation by using various measures such as increasing interest rates. Interest rates allow demand to be controlled by encouraging saving (when they are high) and spending and investment (when they are low).
4. Trade balance
The current trade balance is a comparison of imports to exports that are bought and sold within an economy. Imports are goods and services bought from foreign markets while exports are national goods and services sold to foreign markets.
If the amount of imports is higher than the amount of exports, then a ‘trade deficit’ occurs – citizens of the country are giving money away, so the economy is losing money. Like any economic agent involved in the economy, it is important the national economy at least ‘breaks-even’ – the amount of imports and exports should at least be the same.
If the amount of exports is higher than the amount of imports, then a ‘trade surplus’ occurs – citizens of the country are receiving money, so the economy is gaining money. Government spending helps to develop the national economy and encourage investment, so that the country can continue to remain competitive against other countries.
Introduction to economic policy
Let’s identify the main objectives of the government policy. The government uses various policies in order to affect the economy, its growth, employment levels, inflation and the current trade balance.
These policies include:
- Fiscal policy. Fiscal policy is used to control government spending, TAXation levels for individuals and companies, as well as government’s borrowing.
- Monetary policy. Monetary policy is concerned with interest rates, the money supply and the availability of credit within the economy.
- Supply-side policies. Supply-side policies are used when the government wishes to intervene to correct the market failure. Examples of supply-side policies include privatization, deregulation (increasing competition) and regional policies to stimulate business growth such as training and education for the workers.
- International trade policies. The government attempts to controls imports and exports, which is particularly important, if there is a trade deficit (imports and higher than exports). Examples of international trade policies include tariffs, quotas, embargoes and various free-trade agreements.
Summary
In summary, macroeconomics is the study of the national economy and global economies as well as markets. Governments guide these economies by instigating policies to encourage high economic growth, low unemployment, low inflation, healthy balance of payment, currency stability and inequality reduction.
