Introduction to Macroeconomics

June 26, 2022

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This is an Introduction to Macroeconomics. What is macroeconomics? Macroeconomics is a study of the economic system as a whole. It focuses on overall changes in the economy such as unemployment, growth rate, gross domestic product, and inflation.

Basic Macroeconomic Concepts

National Output
National output is the amount of everything a country produces over a period of time.

Unemployment
Unemployment is the percentage of unemployed workers in the labor force.

Inflation and deflation
Inflation is defined as the rate at which the overall level of prices for goods and services rises.

Deflation is a decrease in the average price level of goods and services or an increase in the monetary value of the same goods and services.

Objectives of Macroeconomics

Sustainability
A growth rate that allows improving the quality of life without unnecessary structural and environmental difficulties.
Full employment
Individuals who are capable and willing to work can find work, despite the fact that there will be some frictional, seasonal, and structural unemployment
Price stability
When prices are generally stable and no rapid inflation or deflation occurs. Price stability isn’t always synonymous with zero inflation; instead, low-moderate inflation is sometimes seen as optimal. While inflation is simply a measure of general price levels, it’s important to note that during periods of inflation, some goods and services’ costs often decline as a result of productivity growth. However, Inflation is a good indicator of ‘price stability.’
Increasing Productivity
Producing more output per unit of labor per hour. Furthermore, since labor is one of the many inputs to produce goods and services, it could also be expressed as output per unit of input factors per hour.
External Balance in the Balance of payments
Equilibrium in the Balance of payments without the use of artificial constraints. In other words, the value of exports is approximately equal to the value of long-run imports.

Macroeconomics Conflict

Economic Growth vs Inflation

There is a conflict between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). As the economy expands, inflationary pressures are likely to increase. Inflation is particularly likely to occur when growth is higher than the long-term growth rate and when aggregate demand (AD) exceeds aggregate supply.

Conflict between Employment and Inflation

During a period of high growth – jobs will be created and unemployment will fall. But when unemployment falls, it can put high pressure on wages, which leads to inflation.

Economic Growth vs Balance of Payments

When consumer spending drives economic growth, the current account tends to be in deficit. This is due to the fact that as consumer spending rises, import spending rises as well.

Economic Growth vs Environment

There is a strong conflict between the economic growth rate and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources.

Macroeconomics Policy instruments

Policymakers must choose alternative policy tools or instruments when policy objectives and goals have been established. These instruments are macroeconomic control levers, and they include monetary instruments like interest rates as well as fiscal instruments like tax rates and government spending.

There are two major macroeconomic governmental policies.

Monetary policy
Fiscal policy

Introduction to Macroeconomics: Monetary policy

The process by which a country’s monetary authority controls the money supply, often aiming for inflation or interest rates to ensure price stability and general confidence in money, is known as monetary policy.

Introduction to Macroeconomics: Fiscal policy

Fiscal policy is the process through which a government changes its expenditure and tax rates in order to track and impact the economy of a country. A central bank influences a country’s money supply through this technique, which is similar to monetary policy.