Role of Current Crisis in Macroeconomics - Essay Example

? “The current crisis sheds more light on macroeconomics than vice-versa”. Discuss. Overview of the Topic Literally, the topic means that the currentcrisis reveals more information on macroeconomics than macroeconomics reveals more information on the current crisis. Conceptually, the topic wants to put up the argument that the factors in the current economic crisis and the trend of its exposes the weaknesses associated with present day global macroeconomics practice. Taking a stand contrary to the topic would mean that a person believes that macroeconomics has been perfect, well utilized, correctly administered and that the current crisis is not as a result of the macroeconomics (Gabby, 2009). On a personal stand, it would be said that indeed the current crisis sheds more light on macroeconomics and that the various macroeconomic conditions practiced across the globe could greatly be attributed to why the global economic state has not seen any impressive growth over the few years. Indeed, instead of amassing the overall aim of instituting various macroeconomic policies to alleviate poverty and make the economic conditions of countries and its populaces better, certain critical misplaced priorities and mismanagement on the part of regulators of macroeconomic conditions have led to a total failure of the ambition. Today, the whole world seems to be in a shamble and economists continues to argue on which line of action is the best – whether macroeconomic conditioning or microeconomic conditioning. In the following text, specific macroeconomic condition, the roles they were expected to play in influencing global economic growth, and how they have failed and created crisis will be looked at. Again, specific contributing factors to why dependence on macroeconomics could not help but led to global economic crisis will be discussed. Finally, recommendations shall be made on how to revive the crisis through macroeconomics. Assessing Specific Macroeconomic Conditions and how they relate to Economic Crisis National Output and Income The output and input of a country is a major indication of the performance of the country economically. Given any period of time; mostly over one year, each nation produces certain about of viable product. Some of these viable products are goods whereas others are services. To find the national output of a particular country, the total production of viable products is summed up. The reason for using the national output to determine the macroeconomic performance of a country is the reason that the viable products, be they goods or services are considered to be tradable products that can yield the country economic income and revenue. National output is therefore considered to be an economic value. In light of this, Riley (2006) posits that the national output can be used to determine the value added to the economy of a particular country. He defines value added as “the increase in the value of a product at each successive stage of the production process.” This is where the need for using the national output to create wealth and thus alleviate a country from economic crisis and hardships come in. This assertion is made against the backdrop that the value added is expected to improve all aspects of a country’s production process and thus make the economic lives of the citizenry at all levels better. It is for this reason that the value added and national output are used to determine the gross domestic product of a nation. Again, the national output is closely related to national income because it is expected that the production rate and production proceeds of a country would determine how much the country will earn on the global economic market. For each sale made, there is an added income to the national economic coffers. This is one reason why the national output is easily used to determine the gross domestic product of a country. According to Riley (2006),”this measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added.” For this reason, a failed national output as a macroeconomic condition can lead to the creation of economic crisis. For countries to maximize their economic growth rate, and create a very firm global image of their economic fortunes, and avoid economic crisis, it is admonished that a lot of prudent measures are put in place to maximize the value of their worth creation to give them better economic standings. A well utilised economy is directed towards maximising national output and income is one that would pay much attention to production and services. The economy will create more room for jobs and improved industrialisation so that if the country depends on this for macroeconomic living, the country will not be disappointed in this regard. Inflation and Deflation Another area that is used as a macroeconomic indication is the rate of inflation and deflation of a country. Again, the inflation of a country has a lot of influence on the determination of the economic fortunes of a country. Whether or not there would be an economic crisis depend very much on inflation. Generally, inflation is the rate of increase in the price of goods and services. If there continues to be sharp increase in the prices of goods and services, inflation goes up and becomes high. Indeed, inflation is used to determine the macroeconomic performance of a country because it gives an indication of several areas of the economy of that country. For instance a fast growing economy may be associated with inflation. The same applies to an overheated economy that is characterised by constant demand for goods and services and their supply (Perry, 2009). But even though increasing inflation can be an indication of a growing economy, it comes with some effects on trading and may thus have negative effect on the economy. For instance if there continues to be constant increase in the price of goods and services, chances are that there will be a lot of people within the national economic spectrum who cannot afford to make purchases at faster rate. A persistent situation will lead to low demand for goods and services and reduction in sales. On the larger scale, income of service providers and merchants will go down and so their contribution to the national economy through the payment of taxes and other microeconomic means will cease. By extension, the economy will be crippled with increasing inflation. Deflation also has similar effects as inflation. Deflation is said to have occurred when there is a general decline in the prices of goods and services (McClain, 2002). In the view of most economists, deflation may be an indication of a declining economy. They believe so because deflation may be an indication of an economy that is not booming with trading activities. This is because once there is a trade boom there would be the national rush for goods and services, leading to higher demand than supply. To balance the quest for goods and services and create equilibrium of income benefit, holders of goods and services naturally increase prices when demand is high to bring about inflation. It is for this reason that economists believe that deflation may be a sign of crippling economy. This not withstanding, deflation may be an indication to the direction of economic growth; that there is the need to substitute dependence on exchange of goods and services as an economic growth factor to another aspect of the economy because the economy is not performing well in trade. Those who man the economy of the nation therefore need to be highly sensitive to the issue of price regulation (and by extension inflation and deflation) as a macroeconomic indicator as it may determine to a large extent, whether or not there would be an economic crisis. This is said against the backdrop that if measures are not put in place to ensure that however the rate of inflation and deflation, there is constant exchange of goods and services, a lot are going to be those who may fall out of business and by extension, their source of livelihood. Unemployment The rate of unemployment is another macroeconomic indicator for every nation. Unemployment is the situation whereby people who are able and qualified cannot get jobs to do. Unemployment is closely related to underemployment, which has to do with the situation whereby people do not do jobs befitting their qualification level and thus undertake jobs that are below their potential. The reason for using unemployment and in some cases underemployment as a macroeconomic indicator is that in an economy where there is active growth and potential towards the success of the labour market, chances are that a lot of people would get jobs to fall on. Where there are no jobs therefore, the indication is that the economy does not support business growth and that the economy itself is not growing. It must be emphasised that in an atmosphere of massive job creation, there is a corresponding massive wealth creation. This is because the personal incomes and revenues of people go up and so they are able to take care of themselves and their families. In relation to the creation of economic crisis, it would be seen that when people in the local economy are not getting jobs to do, it is not only the local people who become deprived of their means of earnings but the larger economy (macroeconomics) as well. This is said against the backdrop that because local people do not get jobs to do, their contribution to economic growth via the payment of taxes will be significantly reduced. It is therefore admonished that conditions be created to promote job creation. Governments are expected to put in place policies that will enhance private participation in job creation as well as foreign investment. The government should also as part of its policy absorb as many qualified people as possible into its employment scheme. Macroeconomic Policies Monetary Policy Monetary policy deals very much with the control of the supply of money into the economy. In light of this, Investopedia (2012) defines monetary policy as “the regulation of the money supply and interest rates by a central bank.” In the view of economists, too much availability of money in the economy is not a healthy situation as the scarcity of money in the economy is equally not a healthy situation. For this reason, there are macroeconomic policies that are targeted at controlling the supply of money to people within an economy. The most significant means used by governments in their monetary policies is the regulation of interest rates. Central banks increase interest rates as a form of discouraging the collection of loans so that there would not be so much money in the financial system. They may also reduce interest rate to attract more money to receive loans to expand their businesses, thereby supplying more money into the economy. Generally, monetary policies may have strong consequences on the economy if they are not well regulated. One of the smartly associated challenges with monetary policies is that in a bid to lessen the flow of money, stronger investors may be discouraged and therefore opt out of a particular country. The effect of this is economic hardship on all who depended on such an investor either directly or indirectly; including the government. Fiscal Policy Fiscal policies are put in place as efforts and attempts to stabilise economies of countries. The reason for such policies is to ensure that there is evenness and balance in all aspects of the economy so that some parts of the economy do not suffer at the expense of others (McClain, 2002). To maximise this ambition, governments depend very much on expenditure and taxation. The expenditure of the government is an indication of how much the government spends over a given period of time. Normally, the given period of time is one calendar year. The government’s, expenditure is normally stated in the budget statement of the government. Expenditure is used to as a macroeconomic indicator and to determine the economic growth of a country because a generally growing economy would be expected to spend more. Such spending is often directed towards jobs creation, the betterment of working conditions and in some cases the settlement of debts. Spending also caters for infrastructural development and sustainable livelihood empowerment programs. A government that does not spend therefore does not create wealth. By an large, the spending habit of the government determines whether or not the economy will grow and thus whether or not there would be an economic crisis. As expenditure or spending takes money away from government, taxation is used as a counter fiscal policy to create wealth for the government for onward spending. A government that does not have effective tax collection system would therefore always have to depend on external aid and donors for economic relief. PEST Analysis accounting for failure of Macroeconomic Conditions Political Factors Most political factors that determine the performance of any economy depends largely on the government of the day. This is because government has a lot of control and authority over the financial regulation of the economy. For instance, through government machinery such as the central bank, the interest rates of countries are determined. Government policies in terms of monetary and fiscal policies also go long ways to influence things such as inflation and strength of currency. Governments are also major stakeholders in the creation of jobs to cater for unemployment problems. By and large, the performance and policies of governments is a major political factor in determining whether or not there would better performance of the macroeconomic conditions discussed above. All things being equal, through governmental policies, there should be a well regulated trade environment that is backed by access to funds for traders and investors so that supply of goods and services will always meet demand. The same applies to issues like unemployment and national output. If through governmental policies there will be breakdown in international image and protocol of a particular nation such that the rate of foreign direct income and other sources of revenue and financial aids received from external sources would stop, then chances are that there would be negative macroeconomic indicators and by extension the creation of economic crisis. Economic Factors The major economic factors that will be considered as agents accounting for the failure of the various macroeconomic conditions are depreciation of currency and access to financial aid. In most parts of the world, the syndrome of currency depreciation and access to loans for investors and corporate businesses is a major economic challenge that thwarts the entire idea of depending on macroeconomic conditions for economic growth (Cliff, 2009). For instance, when the value of the currency of a particular country keeps depreciating, the implication to businesses is that day in and out, they would have to vote in more funds to make up for their expenses. Once the ultimate motive of trading is to make profit, suppliers always make end users the ultimate sufferers of the consequences of extra cost they incurred. By extension, prices of goods and services become astronomical, making lower and middle income earners vulnerable to affordability. The same situation applies when investors have to pay huge sums of money on the loans they take from banks and other financial institutions as interest. Because there is generally low accessibility to loans, investors accept loans even if the interest rates are higher. The resulting factor is that end users suffer high cost of goods and services. Social Factors There is no denying the fact that there are social factors that influence the performance of various macroeconomic conditions and their role in eliminating economic crisis. One of the major social factors that affects the economic fortunes of people as far as macroeconomic conditions are concerned globalisation (Muller, 2002). Globalisation has to do with the easy flow of people, goods and information across various borders of the world. Globalisation is said to have made the world a global village, meaning that it has made the world a very small place to live in the sense that removal of restrictions in travelling from one place to another have virtually being eliminated and so all people of the world are seen as members of one small village (Ankomah, 2005). Globalisation affects macroeconomic conditions and economic growth in the sense that it brings about cross border trade. There are both positive and negative effects of this. On the positive side, globalisation has he potential of leading to the even flow of products across the globe. On the negative side, globalisation has the potential of stagnating the economies of weaker nations in terms of export products (Perry, 2008). This means that countries who do not export more to take advantage of globalisation opportunities will have to import more, thereby weakening the strength of their currency. Technological Factors Technology plays several roles in maximising industrialisation. The use of technology has the potential of making industrialisation easier and also leading to an increase in productivity. This means that technology accounts for a greater share in economic development as it contributes to productivity. The implication to countries that depend more on manual form of industrialisation rather than technology based and mechanised systems of industrial operation stand the chance of losing in the game. Mechanisation and technology can be used to enhance all aspects of production including agriculture. The challenge should therefore be to explore more innovative ways of including technology in all forms of production, and by extension including technology in economic growth. A well taken advantage of economy would use technology to make banking and financial transactions easier, mechanise farming, create jobs, improve education, standardise health delivery, advance infrastructural development, and make the flow and accessibility to information easier. Revising the Global Economic Crisis Further breaks in trade barriers There it has been said that globalisation has brought about essay flow of products, services and people across nations, there is the need to channel most of the focus of globalisation towards breaking trade barriers and equipping global trade. Indeed, no single country can produce all that it desires. For this reason, international trade would have to continue till the end of time. It is however very sad to note that cross border restrictions that lead to the high cost in transporting goods and services from one country to another makes the eventual prices of goods and services very high. This invariably leads to other recurring macroeconomic effects such as fallouts in trade, unavailability of needed products and services, high prices of goods and services, high interest rate, weakness of currency, inflation among others. If import duties would be lowered and tax on transported goods and services would be minimised, chances are that the situation whereby the trade sector of the economy dictates the trend of economic growth would be eliminated. Strengthening of microeconomic factors Another important way of ensuring that the world does not suffer from frequent economic crisis and economic shocks is to pay more attention to microeconomic factors and strengthen their role in global economy. Knowing that microeconomics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources”, this will help in structuring national economic policies to cater for the immediate needs of people rather than looking at economic growth from a wider perspective (Science Daily, 2012). Indeed, solving the daily economic needs of people at the grassroots will ensure that there is an expanded version of such needs at the global level. According to Investopedia (2012), “microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it.” This means that if microeconomic policies are strengthened, there will be more room for the process of demand and supply to continue in such a way that people will always be in a position to have what they need on the economic market. REFERENCE LIST Investopedia. Microeconomics. 2012. Web. March 27, 2012 Cliff, Thomas. International Trade Potentials. Cairo: Mighty Press Limited. 2009. Print Muller, Steve. Macroeconomic Indicators and Reactors. Munich. Alpha Publishers. 2002. Print Ankomah, Dominic. Dispensing Economic Partnership and Trade Reviews. New York: Dynamite Press Series. 2005. Print Perry, Dadson. Macroeconomic Indicators and their Implications to Global Economic Growth. London: Oswald Press Association. 2008. Print. Gabby, Gabriel. Trade Maximisation and Growth. Oxford: University Press Limited. 2009. Print. Tawiah, Justice. Financial Renaissance and the impact of Globalisation. Durban: PrintMark Publications Limited 2009. Print. Science Daily. Microeconomics. 2012. Web. March 28, 2012 Investopedia. What is Monetary Policy? 2012. Web. March 22, 2012 McClain, Thomas. Macroeconomic Indicators and Economic Performance. New York: Wiley Press Limited. 2002. Print Riley, Geoff. AS Macroeconomics / International Economy. 2006. Tutor4u. Web. March 23, 2012. Read More