Evaluation of the Differences in the Composition of Wealth between Economic Classes - Essay Example

Economy INTRODUCTION According to Dornbusch (2004), “macroeconomics is concerned with the behaviour of the economy as a whole” (Dornbusch 2-17). Thus, it can be asserted that macro economy deals with long-terms economic growth and short-term fluctuations in a business cycle. In simple words, it can be define as a branch of economics, which assists in measuring the performance, behavior and structure of an economy as a whole. It helps in forecasting gross domestic product (GDP) of a nation (Hubbard1-29). THESIS STATEMENT In this discussion, the main objective is to critically evaluate the distribution between wages and profit in relation to consumption in the macro economy. In addition to that essay also evaluates the differences between consumption of wealth and economic classes using relevant example. On further note the essay analyses the impact of growing inequality on the U.S. macro economy. CRITICAL EVALUATION OF THE DISTRIBUTION BETWEEN WAGES AND PROFIT IN RELATION TO CONSUMPTION MACRO-ECONOMY In order to define the consumption concept in macro economy, it can be asserted that macro economy is considered to be extremely complicated which is observed to influenced by several factors. It assists country to measure and forecast the total productivity of the country. Total productivity of a country suggests the economic status of the country among entire world. It can be evidently asserted that multinationals used to evaluate its business opportunity through the help of macroeconomic concept. Wages and profit is directly and indirectly related with macro economy. The concept gross domestic product is related with wages and profit that has been illustrated below: GDP= C + G + I (X-M) Gross domestic product = Consumption + Governmental Purchases + Investment (Export- Import) C= Consumption G= Governmental Purchases I= Investment X= Export M= Import From this concept, it has been magnified that consumption refers the total amount of durable and non-durable goods and services produced by the country within a calendar year (Villaverde 1-627). In accordance with modern economist Lord John Maynard Keynes (2003), income and wages determine the volume of employment in an economy which eventually depends upon the level of effective demand (Keynes 1-14). Consequently, the level of effective demand can be determined through the help of aggregate demand function and aggregate supply function. In case of two sector model, where government, industries and consumers’ are performing its operations, aggregate demand can be segmented in to two components such as consumption expenditure and investment expenditure. Thus, it can be asserted that consumption expenditure is an important component of aggregate demand in an economy (Keynes 1-14). In order to define the concept of consumption function it can be asserted that consumption of a commodity depends upon the level of income. In addition with that it can be evidently asserted that there are many other factors which can influence income. Thus, it can be asserted that from the consumption function, Income = value of output = consumption + investment. Saving = income  consumption. Therefore saving = investment [Source: (Keynes1-14)] On the contrary, as per the Ricardian theory macro-economic model can be segmented in couple of principles. Those are marginal principle and surplus principle. Marginal principle refers the share of rent and surplus principles define the division between wages and profits. According to Ricardian assumptions it can be asserted that in case of an industry if wages of labor increase then the amount of profit decreases. From a country’s macro-economic point of view it can be asserted as, if consumers’ in the intention of savings more reduces the investment then the consumption will decrease automatically (Kaldor 83-100). From the evaluation, it can be apparently affirmed that in an economy if the wages remain constant then profit margin will increase and if wages became high then the amount of profit will be decreased. Thus, it can be asserted that the distribution between wages and profit relation is inversely proportional in consumption in macro economy. EVALUATION OF THE DIFFERENCES IN THE COMPOSITION OF WEALTH BETWEEN ECONOMIC CLASSES In case of macro-economy wealth can be define as a distribution of income of a country. On the other hand, in case of economic classes consumption of goods and services can satisfy consumers’ needs and demands. In accordance with Organisation for Economic Co-operation and Development (2013), distribution of consumption can be considered in both theoretical and pragmatic grounds. From the theoretical point of view, households can ensure smooth consumption through altering savings, drawings, wealth and borrowings. Incomes can be settled volatilely by households through relying on long-term income expectations rather than current income (Consumption Organization for Economic Co-operation and Development, “OECD Framework for Statistics on the Distribution of Household Income”). On the contrary, households can utilize wealth for consuming more than income or it may allow households to consume less than their income. For an example: By using the savings wealth can be made by purchasing assets or through releasing mortgage wealth can be also made. Wealth provides individuals smooth consumption over the time (Consumption Organization for Economic Co-operation and Development, “OECD Framework for Statistics on the Distribution of Household Income”). From the evaluation, it can be stated that various factors contribute towards the differences in the composition of wealth between the economic classes. ANALYSIS THE IMPACT OF GROWING INEQUALITY ON THE U.S. MACRO ECONOMY As it was mentioned earlier that macro-economy concept suggests the overall performance of an economy. According to the observation, it can be seen that households’ income distribution has been unequal in US. Over the years, it has been observed that US industry have the tendency of increasing its profits. In order to attain that objective several industries have tried to reduce its real wages. As an effect direct impact has been seen on employment. In order to attain high savings, consumption has been reduced. On the contrary, unemployment remained stabled during that phase. This unemployment problem led US towards the inequality. For an example: If households’ per capitia income reduced then the effect can be seen on income as a result consumption will be reduced. Due to reduction in the consumption price of goods will increase immediately, leading to higher inflation in economy and as a result of increasing rate of inflation, inequality can be seen. The impact of growing inequality in US market has been shown below, with the help of graphical representation. Fig: 1Inflation and Unemployment in U.S. market (Gordon, “Choosing Unemployment: Macroeconomic Policy and American Inequality”) CONCLUSION From the analysis, it can be asserted that concept of macro-economy is highly valuable for a nation in order to achieve stable growth economically. Apart from this, it has been observed that distribution of wages and profit can put an impact on savings, income and investment for an individual or enterprise or a nation. Moreover, it can be evidently affirmed that during consumption of wealth households must consider its savings and income level. Thus, in order to conclude the topic it can be asserted that lack of growth of an economy can causes inequality as observed in the case of the US. Works Cited Dornbusch Rudiger. Macroeconomics. New York: Tata McGraw-Hill Education, 2004. Print. Gordon, Colin. Choosing Unemployment: Macroeconomic Policy and American Inequality. 2014. Web. 07 May. 2014. Hubbard, R. Glenn. Macroeconomics. India: Pearson Education India, 2007. Print. Keynes, John Maynard. General Theory of Employment, Interest and Money. New Delhi: Atlantic Publishers & Dist, 2006. Print. Kaldor, Nicholas. “Alternative Theories of Distribution”. The Review of Economic Studies, 23.2 (2010): 83-100. Print. Villaverde, Jes´us Fern´andez. “Macroeconomics: an Introduction”. University of Pennsylvania, (n. d.): 1-627. Print. “OECD Framework for Statistics on the Distribution of Household Income”. Consumption Organisation for Economic Co-operation and Development. Web. 07 May. 2014. Read More