The study of macro-economics is very important, especially in our times. In times such as these when the individuals in the economy are largely affected by the changes resulting from it, it is important to understand what it is and how it can be used to benefit the individual.
Macroeconomics is defined as the study of the variables in the economy such as levels of employment, interest rates, output and prices, studying what determines their levels in the economy and the policies that are used to influence these levels. One must understand that the economy’s role is to harmonize between the goods and services supplied and the amounts wanted by the consumers. There must be enough supply of money also to cater for the amount of goods and services bought. The harmonization between the three: demand for services and goods, supply of the same and the monetary capacity to harmonize the two can either be achieved automatically or through government intervention and coordination. The coordination experienced through government control is characteristic of communist countries such as the former Soviet Union.
However, in market oriented economies, the process of coordination occurs automatically, a method that has proved effective. This is achieved through automatic changes in the interest rate, output, employment, and price levels to restore equilibrium. The changes occur to restore balance in two key areas: between output levels and the demand for the output and between monetary supply and its demand. These can be examined in the light of three aggregate magnitudes: GDP, APE and ASF. These three through the interplay of the above variables are brought into equilibrium such that GDP= APE= ASF.
The government however may get involved in the coordination process for various reasons. As stated above, this is not necessary as the economy automatically achieves equilibrium without the intervention of this institution. The efforts by the government to interfere with the macroeconomic coordination process so as to manipulate the variables are sometimes not very healthy for the economy.
Macroeconomic processes are not very well understood by many and this misunderstanding leads to wrong diagnosis by the individual. They often see the adjustments as symptoms of system failure. The truth is that these adjustments are necessary and important for the economy as a whole. Therefore is important to study macroeconomics for this very purpose: to gain full understanding of the economic events in your economy. You will be able to correctly point out and identify the various variables and their effects, fully aware that temporary glitches do not represent total system collapse and failure. These adjustments are normal and necessary. Understanding them will allow you to achieve peace of mind amidst all the doom and gloom forecasts.
With your improved sense of assessment, you will be able to accurately forecast economic events. This will place you in a unique situation allowing you to take advantage of the events or protect yourself from them before they occur. This will enable you to protect your financial interests and make smart economic decisions.
Finally, understanding macroeconomics will help you perform your civic duty of voting much better. By being able to assess the various candidates and their economic policies, you will be able to understand and evaluate whose policy is better and more sustainable.
The GDP is a measure of the volume of output from the limited factors of production a country has in its possession within a given time period. These factors include:
All these factors are used in the production process, a process where they are combined in their various suitable quantities to produce a selection of goods and services. This is of course subject to the levels of existing technology.
However, there are a few problems connected to the measurement of GDP in the economy. First is the issue of unit of measurement. Since the various goods have different, and sometimes no, units of measurement the choice as to how they can standardize the measures is tricky. Indeed it is difficult to measure the volume of service rendered within an economy. The solution therefore, is to measure using the value as opposed to the volume of goods and services. This results in the definition of GDP changing from being the volume of output to the value of output in a year’s time.
However, the measurement of value still is not without its own complications. Thee measurement of GDP occurs with use of the market values. Some products, though, do not have market values and are consequently measured using the cost of production instead. The Department of commerce must also take note to remove the cost of goods and services originating from the outside of the country. They must also take care to measure only the final goods and services, to avoid multiple counting. The problems in tabulation arise for different reasons. One is lack of data, especially from illegal goods. These transactions are not recorded hence leading to errors. Other unrecorded transactions occur within the family. Services rendered within the home that are not recorded. However, the aim is not to be extremely accurate but rather to give data that is consistent and that gives a workable picture.
Another problem arising from the tabulation is the use of the value as opposed to volume, which is impossible. The values of goods and services experience fluctuations in the form of inflation, causing there to be a problem in comparison between one year and the next. This is solved through the use of price level indexes.
Price level indexes are a tool used to eliminate the effect of inflation on the GDP so that accurate comparison can be done. The first step in measurement is the identification of a base year. Then a representative product list that gives an average of the national product mix is given. This list is called the market basket. Therefore, using this basket we can calculate the average change in price from one year to the next. The average percentage increase is used to calculate the price index. Since this figure is an average, it gives representation to all the various goods and services. The GDP is adjusted through this index. The result is that the GDP for subsequent years is converted into the value of the base years. Therefore, it is easy to tell the real increase in GDP resulting from an increase in output. This is important as it tells us whether the increase was inflation induced or was output induced.
It is important to note that the GDP is the production in the economy and the GDI is the income experienced as a result. Therefore the GDP and GDI are matched directly. In this way, it is always true that GDP is necessarily equal to GDY. It is also prudent to distinguish between money and income. Money is only one form of transmitting income and therefore it is important to note that production generates income and not money. Since the money is not enough in the economy, responsible use of credit is also very important in running the economy.
The department of commerce groups income recipients into three groups:
Households receive disposable income (HY) of which some is taxed, while some is given away. In America they receive the largest portion of the GDY.
Businesses receive income in various forms and also give the government tax, transfer some to households and foreigners. The remainder is business savings (BY)
The government receives income in the form of taxes and distributes it to the business and household sectors as transfers. The result is net government revenues (GY).
The foreigners receive transfers from the other sectors. It is represented as TF.
The fact that GDY always equals GDP means that even with an increase of price levels, the total income would also change to accommodate this change. However, the changes may not be equally represented in the various sectors. This means that while the income of one group may increase, another group decreases but the total income must still equal the total output.
Letting APE represent the total demand goods and services, we then get to interact with imports, output from outside. The imports, however, are not included in GDP and GDY calculation. They also only decrease aggregate demand if the local buyers use them in place of the domestic purchases previously used.
The interaction of these three equations, specifically APE and GDP allows one to see how stability is maintained between the demand and supply of goods and services. If APE equals GDP then there will be equal demand and supply of the national output. If the APE exceeds the GDP, there will be excess demand resulting most likely in inflation. If the opposite happens, where GDP is greater, there will be insufficient demand for the goods and services produced in the economy. The result is that there will most likely be a recession. The relationship between the budget surpluses of each sector of the economy also interacts to offset the budget deficits of others in order to produce equilibrium. If, for example, the household saves more, the other sectors must compensate for the demand lost otherwise there will ultimately result in a recession. The various variables in the economy: interest rates, price, output and employment, come into play in these cases to cause automatic adjustments so that equilibrium is attained again. However, the Keynesian school of thought argues that the government should actively participate in this process through the use of fiscal policy.
The federal government deficit presents a unique opportunity for the government to borrow, earn money and finance its operations. Despite the concerns of many, the proper use of the amounts and funds from the federal debt incurred presents many advantages. This is because the government uses Treasury securities that allow them to “roll over” their principle debt. Therefore the sum borrowed is not repaid but rather the interest on it is. The fact that the debt represents assets that are in place of the same value takes the net effect to zero. The system also allows the state, local governments and corporate bodies to earn money from the idle sums they hold. Since this a secure investment as one avoids capital and default risks, it offers a unique opportunity to various bodies for investment.