What is Macroeconomics - Essay Example

Introduction Macroeconomics is that economics that deals with the structure, performance, decision making and behavior of an economy in a bigger picture, rather than specific markets. It’s inclusive of global, regional and national economies. Macroeconomics deals with the aggregate indicators like prices, unemployment rates and GDP in order to know how the entire economy works. Macroeconomists build models that clarify the connection between factors like international finance, national income, consumption, output, savings, inflation, unemployment, international trade and investment. In contrary, micro economics is basically fixated on individual agents’ action like consumers and firms and in what way do their behavior affect quantity and prices in particular markets. As macroeconomics is a wide study field, two fields of researches which are symbolic of the subject. The move to understand the consequences and causes of short run variations in a business cycle and the move to know the determinants of economic growth are some of its main objectives. Macroeconomics model and its forecast are used by large corporations and government to assist in evaluation and development of business strategy and economic policy (Dwivedi, pp.7) Macroeconomics concepts Macroeconomics comprises of variables and concepts though there are 3 core issues for macroeconomic research. Macroeconomic theory always relates inflation, unemployment and output. External to macroeconomics, the topics are extensively vital to economic agents inclusive of producers, consumers and workers (Dwivedi, pp.23) Output and income The general economic activity for the economy is briefed by an output aggregate measure. As the manufacture or services and goods output generates income. Each entire output measure relates to the measure of aggregate income. The states of America today employ the concept of aggregate output known as GDP (gross domestic product). The gross domestic product is the measure of services and goods currently produced at market prices value. An individual should note that there are many GDP measure features. To start with, only presently produced goods are encompassed. This means that when one purchases an old Tudor house aged 150 years, it does not add up to the GDP. What adds to the GDP is the service that the estate agent renders in the house purchasing process. Secondly, end products are counted. For avoidance of count, intermediate goods do not add to the GDP. For instance, steel that is used in automobile manufacture is valued as a whole. Lastly, all services and goods encompassed in GDP are assessed at market prices. Hence the prices show the prices paid by consumers at retail level inclusive of indirect taxes like sales taxes. GNP (gross national product) is a similar measure to GDP. Up to late, the government has employed GNP as the core measure of economic activity of the nation. Changes in trends always places more effect on income or output instead of prices (Blaug, pp. 108) There is a slight difference between GDP and GNP. The GDP is exclusive of income that the U.S resident and companies earn abroad. Many other income and output measures are consequent from GNP. They are inclusive of NNP (net national product), which extracts an allowance for tear and wear on equipment and plant from GNP called depreciation. Though these measures change down and up in a general same fashion, it is disposable income which is closely tied to customers demand for services and goods. It is the most outstanding aggregate demand component and entire demand for services and goods in the economy from sources. It should be noticed that the entire output or income measures deliberated above are always mentioned in real terms and nominal terms. The real terms are attuned for inflation and hence widely used as they are not distortion subject introduced by price changes. Unemployment The unemployment number in a state is measure using the rate of unemployment, workers percentage with no jobs in the labor sector. The labor sector purely includes active workers searching for jobs. Individuals who had retired, still in colleges, or disillusioned from no availability of jobs are not included in the labor force. The real reason behind the increased unemployment rates is because of increased growth in the economy. Unemployment can in general be classified into many kinds that are associated to various causes. Classical unemployment takes place when the salaries seem to be high for the employers to recruit more labor. The wages may be high as a result of union activity or minimum wage regulations. Depending on classical unemployment, the frictional unemployment takes place when if there are appropriate jobs for workers though the allocated time to look for and get the job end up to unemployment period. Structural unemployment on the other hand, moves across a wide range of probable causes of unemployment inclusive of mismatch between the employee’s skills and the skills that are needed for the job that is open. A big portion of structural unemployment may take place if a state is changing industries and employees find that the skills they have do not match the then required skills. Structural unemployment is the same as frictional unemployment as both of them show the mismatching of employees with open jobs, although structural unemployment covers needed time to get new skills. Whereas some kinds of unemployment may take place independent of the economy’s condition, cyclic unemployment takes place when there is stagnation in the growth rate. Okun’s law shows the empirical relationship that is between economic growth and unemployment. The initial version of this law stated that if output of an economy increases by 3%, there will be a consequent unemployment rate decrease of 1%. A remedy to the unemployment situations can be employment of tax as it balances spending habits (Blaug, pp.94) Inflation and deflation In the economic world, there are two basic terms that are employed in the description of price changes of services and goods over a period of time: deflation and inflation. For investors, it is very vital to know what deflationary and inflationary times can cause to investment. In this particular paper, a definition will be provided on the two terms deflation and inflation. Then after which an explanation will be given on how they are measured. Lastly, a brief description is provided for investment options to correct such states. Inflation and Deflation In macroeconomics there are ways in which one can describe the transition in services and goods prices overtime: Inflation is a persistent price increase of services and goods over a period of time. During this period of inflation, money loses the purchasing or buying power and it needs more currency units to buy same units of services and goods. With time, inflation leads to low value of every currency unit. Deflation on the other hand, is a persistent decrease in services and goods prices over a period of time. At the times of deflation, money increases its purchasing or buying power and takes less currency units in purchasing same units of services and goods. Over a period of time, deflation increases each currency unit’s value. Controlling inflation Generally, economists favor a steady and low inflation rate. The task of maintaining inflation under control is allocated to monetary authorities at the reserve of the government. Decreases and increases to the supply of money can be employed in the regulation of economic growth. The measures employed in the money supply control are inclusive of interest rates, selling and buying government securities and bank reserve ratios. Interest rates The relationship that exists between inflation and interest rates is comparatively straightforward. When the economy expands very fast, the reserve may decrease the supply of money by increasing interest rates. High rates of interest discourage borrowing that reduces money supply. For growth increase, the reserve may lower interest rates via discount rate, which banks are charged if they take money from the government reserve. Open market operations The reserve with the central bank can control supply of money via selling and buying bonds. If the central bank purchases securities, it exchanges money for security. Consequently, if the government intends to decrease inflation, it sells government bonds for money hence reduces money supply in the economy. Equally, if the central bank requires reducing deflation it can purchase bonds. Bank reserve ratios While arguably, the reserve requirement may be employed in the control of inflation, the measure is not always applied in establishment of monetary policy. What is required of banks by the government is an amount of money to be kept in vaults of the reserve. What is required to be specific is a fixed ratio of customers deposits kept at every bank. When the reserve seems to slow down economy, the reserve requirement is increased hence decreasing money supply. Likewise, if the central bank needs to fight deflation, the reserve requirement is decreased. Hyperinflation When inflation reaches a level where it cannot be controlled, there is a possibility of price increase by over 100% every month. In general, hyperinflation as a term is applied if price increase exceeds 50% every month. When this continues, the monetary system of a country can collapse. It means that the money of a country loses its worth. Measuring inflation In the U.S, the inflation measure that is common is the CPI. There are also other measures that are employed by the bureau of statistics aimed at identification of economic trends inclusive of: Consumer price index (CPI) - the program screens prices changes that urban consumers pay monthly for a basket of service or goods. The basket is inclusive of dental services, shelter, clothing, food, doctor, fares, transportation and fuels and prescribed medication. The CPI is applied by various organizations in adjusting of rents, wages and items that are change in living cost (Dwivedi, pp. 448) Producer price indexes (PPI) –these are indexes objected at measurement of change in selling prices established by local producers of services and goods. At some time, they were referred to as wholesale price indexes, and it indicates the cost of production of goods. Employment cost trends (ECT) – they are also known as National Compensation survey. They publish indexes which traces salaries, wages, overtime rates, labor costs and employee’s benefit costs. Beating inflation Usually, gold investment is a hedge employed by investors to protect them from inflation. Of recent gold has been selling at the rate of 1,700 dollars an ounce that seems not to be a better choice for investment. To add to gold, the investments mentioned below provide protection from inflation: Treasury Inflation Protected Securities (TIPS)- the inflation index by the government, the main bond is adjusted by the use of CPI. The rate of coupon on bonds stands to be constant for any increase in the principal bond; there is decrease in bond yield. I bonds- the US savings links with face value that is fixed, although a yield which ranges with inflation. There are two aspects of this interest rate: a rate that is fixed which earns monthly interest and a living cost adjustment that takes place each 6 months. Corporate Inflation linked bonds: a security which adjusts every month for CPI changes. Inflation-Protected Annuities (IPA): increases their pay every year the basis being on inflation measure or percentage made by investor. If he chooses moderately high increase every year, the first annuity pay would be lower. Beating deflation If deflation takes place, the services and goods prices are reducing; therefore the basic goal for investors at this time is holding cash as the average value increase. The one approach to hold cash is by treasury bonds that are short term or placing funds in the money market. An alternative approach is corporate bonds an interest with fixed rate. If the government lowers rates of interest, the bond rate value increases. Lastly, in a similar measure investors usually held gold to fight inflation, it’s wrong to purchase gold during deflation. Conclusion In a nutshell, the concepts of macroeconomics are unemployment, inflation and deflation, output and income. The output is dependent of all this factors. Works Cited Blanchard, Olivier .Macroeconomics Updated (5th ed.). Englewood Cliffs: Prentice Hall, (2011). Dwivedi, D.N. Macroeconomics: theory and policy. New Delhi: Tata McGraw-Hill, (2001). Blaug, Mark. Great Economists before Keynes, Brighton: Wheat sheaf. (1986) Read More