Macroeconomics in a Nutshell - Essay Example

Macroeconomics: GNP Macro economics is apprehensive with the study of the economy at large as a whole. The main objectives of macro economics to attain are: an improvement or upgrading population’s living standards; create a low unemployment rate and low inflation rate. A low inflation rate is desired in itself, above its ability to promote the other two macro economics objectives. The three objectives should be achieved subject to two significant financial controls. The government has to maintain a long term balance in the public finance and the balance of payments (McEarchern 67). There are also constraints caused by the presence of factors of production. We are considering these objectives, the affiliate constraints and the correlation between them. Above all factors, macro economics aims at the factors that contribute to improving people’s living standards over the long run. In order to follow the performance of an economy over a period of time and to judge it against other economies, we should measure the output of all the goods and services produced. One measurement for this is Gross National Product (GNP). GNP is closely related to the concept of National Income. It is the total amount of income received by certain country (Arnold 89). The national output is closely connected to the nation’s income; the more the nation produces, the more the income generated. A prime aim of macroeconomic policy is finding ways of growing GNP and national income. If achieved, then the living standard of the county’s population is raised. Consequently, we use adjust in income as a proxy measure for adjust in the living standard of a population (Blanchard 79). While GNP measures the intensity of output for a given year, the measure increases in living standards of individuals. We are attracted on how GNP changes from one year to another. In this context, it is crucial to differentiate between changes in real and nominal GNP. The real GNP is calculated using prices experimented in same encoded base year, while nominal GNP is computed using the actual prices;. A raise in nominal GNP can be a result of both or either higher prices and more output. A raise in real GNP implies that a greater quantity or volume has been produced. On improving the national standard of living of population, it is the change in real GNP or the volume that matters. If increases in nominal GNP are caused by the price increases only, people end up not becoming better off. Alteration on real GNP is closely connected with rate of employment and unemployment. The real growth rate is used to measure the percentage change in real GNP year to year. An elevated and steady rate of economic growth is one of the main goals of macro-economic policy (Krugman & Wells 105). The inconsistency of the real growth rate over time is known as to as the business cycle. A peak depicts an upper turning point, and a trench or trough is a lower turning point. A downturn in business cycle is called a contraction in output, and an increase in the growth rate is called an expansion. In the US, the economy is said to be in recession when a contraction lasts for more than two consecutive calendar quarters. If a recession is deep and prolonged, it is referred to as a depression. The macroeconomic objective in terms of the business cycle is to even out recessions and booms, and maintain a constant level of economic activity. The business cycle is vital since it acts as an indicator of business activity. If a high growth rate is probable, firms will reflect on new investment projects and employ more workers. If slow growth is predicted firms will delay investment plans and reduce the size of their labor force. The meaning of term unemployment is filled with difficulties. In general a person is said to be unemployed if he or she is seeking for work and willing to agree to a job contract at the going wage rate for the type of work that he or she is competent to do. The labour force is the total numbers employed and unemployed people. The unemployment rate is defined as the total number employed percentage of the labor force (Blanchard 54). The unemployment rate linked with possible GNP is said to be the natural rate of unemployment. The is level of unemployment that reflects resistance is the labour market and if an economy’s unemployment rate is equivalent to the natural rate, the labour market can be said to be in balance or equilibrium. Economic growth is not just enough on its own, but a way towards improving the comfort of the population. A high unemployment rate joined with rapid growth of GNP would not be a very pleasing situation. However, a growing GNP tends to decrease unemployment. American economist, Arthur Okun, estimated that in the United States for every 4% increase in real GNP, unemployment fell by 1% point. This connection became known as Okun’s Law. Therefore the macroeconomic objectives of growth and unemployment are closely related (Nolling 70). The expense of unemployment to individuals and society are extremely serious. Unemployed people suffer a low level of self-esteem, which can cause personal stress and suffering and suffer a loss of earnings. In numerous countries this is common between the employed and unemployed through transfer expenditure. High unemployment has severe budgetary inference, through enlarged social interests expenditure and condensed tax revenue. The economy loses the productivity and earnings that would be created if the unemployed could get work. Inflation is calculated using a price index, which is a biased average of the individual prices incorporated in it. The annual inflation rate is equivalent to the percentage change in the price index in a year. Low inflation is a target of macroeconomic policy due to the costs of high inflation. In addition, a low rate of inflation rate is considered enviable because it means confidence and steadiness and facilitates economic growth. Inflation minimizes the purchasing supremacy of money and people living on fixed earnings suffer low living standards. Inflation also reduces the capacity of domestic firms to compete with their global rivals resulting to reduced productivity and increased unemployment. Price increases inflict costs on firms and retailers who then have to reprint their price lists. Consumers have to go to extra trouble to find out the price changes so as to keep up to date. These are the menu expense of inflation. People who have savings are hit by inflation, which lessens the purchasing power of their savings when inflation beats the rate of interest while borrowers gain by going into debts and repaying the loan with money whose value has decline (Blanchard 108). Policy makers would like to raise incomes and realize more rapid growth, but they are inhibited in how efficient they can be in this area. The main constraints are: real constrains and financial constrain. National income relies on what its population can produce and sell. The main factors of production are capital and labour. The labour force works with the country’s capital stock. The greater the capacity and skills of the labour force, the more capital tools available to each worker, and the more technically superior this capital, the high the value of output. The rate of growth of the economy’s GNP will depend on the growing rate these inputs. The major financial constraints are the financial deficit and the balance of payments. These act as constraints on the government’s capacity in achieving growth and employment objectives. The financial deficit is the balance between government income and government expenses. Cumulative borrowings to finance the financial deficit lead to a raise in the national debt. The trouble with the national debt is that it has to be taken care off. Any interest must be paid on outstanding balances. If the national debt grows extensively a government may be forced to introduce policies to cut the financial deficit, in spite of of the cost for growth and unemployment. In a sense, a policy tool (government expenditure) eventually becomes a policy objective, which eventually takes priority over unemployment, growth, and inflation objectives. The balance of payments is a record of a country’s business with the rest of the world. The product on the balance of payments can influence the exchange rate. A shortfall may cause exchange rate depreciation and excess may lead to an appreciation of the exchange rate. Exchange rate has key implications for the economy and in mostly the inflation rate. For instant, a policy that boosts the real growth rate could cause a rapid rise in exports and a balance of payments deficit. A related depreciation of the exchange rate could increase inflation and destabilize the growth rate (Agarwal, Deepashree & Vanita 231). Some economists argue that the best outcome will be achieved if the economy is left on its own. Market economies have showed remarkable capability of raising population living standards and reducing poverty all through the world. Centrally designed or socialist economies have failed miserably to deliver slightly comparable results. Policies that guide to the development in the competence of the labour force or higher rates of venture in capital can endorse faster growth. These policies influence the real sources of economic growth, which are the amount of capital available to work with and the quality of the labor force. Works Cited Agarwal, Deepashree & Vanita. Macroeconomics. New York: Tata McGraw-Hill Education, 2006. Print Arnold, Roger A. Macroeconomics. Connecticut: Cengage Learning, 2010. Print Blanchard, Olivier. Macroeconomics. New Jersey: Pearson Prentice Hall, 2009. Print McEachern, William A. Economics: A Contemporary Introduction. Connecticut: Cengage Learning, 2009. Print Nolling, C.E. Macroeconomics. Connecticut: Cengage Learning, 2008. Print Paul R. Krugman, Robin Wells. Macroeconomics. New York: Worth Publishers, 2009. Print Read More