A Macro-Economic Analysis of Child Labour in Sub-Saharan Count - Example

Macroeconomics Lecturer’s Due THE ORIGIN OF MACROECONOMICS Macroeconomics refers to the subdivision of finances that studies the performance, decision making, structure and behavior of the economy as a whole. Unlike microeconomics, macroeconomics mostly focuses on the whole economy rather that individual markets. The area explores various factors such as business cycles, unemployment, monetary theories and recession, which led to its development (Akin, 2013). The section below aims at discussing some of the reasons that led to the growth of the macroeconomics theory. Second, it intends to give an analytical review of the chronological development of the phenomena up to date. Based on the early macroeconomists, macroeconomic theory emerges from the research of commerce cycles and monetary theory (Blanchard, 2009). Before the development of macroeconomic theory, some of the classical theories advocated that monetary aspects lacked any impact on total output. However, John Maynard Keynes countered that argument by explaining macroeconomics through factors such as unemployment and recession. He realized that during global recession crisis, most business people refrained from any investment of money and people had a tendency of hoarding cash. Business Cycles Commencing in the 1860s, economists tried to elucidate some of the cycles of regular and aggressive change in economic activity. The investigation of the business cycle theory is one issue that brought about the development of the macroeconomic principle. A prime milestone was the development of the National Bureau of Economic Research in 1920, which marked the beginning of statistical models that explained cycles and trends in global markets (Blanchard, 2009). Despite, the business cycle theory had little impact on the public policy. It comprehended product and monetary markets as separate entities. Monetary Theory Originally, the quantity hypothesis of money described the association between price level and output. The theory observed the whole economy via Say’s law, which affirmed that every item supplied to the market sells, and the market is cleared. It showed that money cannot affect factors such as output levels in the economy. The quantity theory of wealth majorly dominated the macroeconomic theory. A number of classic theories, including Fisher’s, believed that the speed at which currency takes part in transactions remains the same and autonomous of economic activity. However, economists like John Maynard Keynes challenged that by developing the cash-balance theory. That theory disregarded the assumption that quantity and demand were always at equilibrium. It included the fact that people held cash during unfavorable economic times. The cash balance theory explains that people held money for two main reasons, which are to facilitate transactions and retain liquidity. Later on, Keynes added that individuals in an economy hold money due to speculation (Blanchard, 2009). Unemployment and Recession Finally, unemployment and recession stand as factors that contributed towards the development of macroeconomic conjecture. In Keynes’s theory, employment and output move along aggregate demand, investment and the level of consumption. Employment depends on the fluctuation aggregate demand stemming from the investment. During recessions, the government would increase the level of spending and employ inactive labor. Both factors led to the generation of the multiplier effect, which describes new employment and how new workers use their returns, which would infiltrate into the economy and thereafter, firms would invest to counter the increasing labor demand. Ways on how to explain the interconnection between global recession and unemployment around the world in 1920s led to the need for a theory that explains economy in a more sophisticated view (Matthews, 2012). Both monetary theories and business cycles were the first stages of developing macroeconomics. Second, economists can say modern macroeconomics began with Keynes in 1936. He extended the perceptions of liquidity preferences and the Keynesian theory was the first to bring together both real economic and monetary factors in order to explain unemployment. The theory argued that the economic output relied on the velocity of money. He explained that during difficult economic times, people held money more and reduced their expenses, which further slowed down the economy. One of the strengths of the Keynes model is that it explains consequences such as unemployment and recession. Progressively, the Keynesian theory received a number of debates including the interpretation of unemployment. The neo-Keynesians became the next generation of macroeconomists that came up with the neoclassical synthesis. They aggregated both Keynes’s macroeconomics and neoclassical microeconomics. By the 1950s, a large number of economists accepted the synthesis perspective of the macro economy. A number of economists enhanced the Keynesian models, gave formal hypothesis of consumption, investment and money order. In 1937, John Hicks printed an item that showed how markets for money and merchandise met at equilibrium. The Investment saving/ Liquidity preference-Money supply was a model used for policy analysis in the 1960s. The model concentrated on interest rates as the medium through which cash supply impacts factual variables such as aggregate demand and employment. Since the early Keynesian model assumed that price levels and other wages stood fixed, it failed to explain cases of inflation. Therefore, in 1958, A.W Philips developed a price level theory, which showed that inflation and unemployment were inversely related (Blanchard, 2009). Monetarism became the next development of macroeconomic principles, which Milton Friedman came up with by revising the quantity hypothesis of money to incorporate the role for money demand. The economist contended the Keynesian theory by describing how money in the financial system was enough to describe the Great Depression instead of the aggregate demand. The monetarist theory became prominent in the early 1980s. However, it collapsed when the central banks found it cumbersome to aim at money contribution instead of interest rates. Additionally, it fell out after central banks created recession as a way to reduce inflation. The final stage of macroeconomic development is the New Keynesian. These new models showed other cases where rigid prices and wages resulted to monetary and fiscal policy having authentic impacts. New Keynesian models explored causes of sticky prices and wages as a result of defective competition, which allowed fiscal policy to impact quantities as an alternative for prices. Towards the end of 1990s, the rigidities of new Keynesian Theory combined rational expectations and RBC methodology to create dynamic stochastic general equilibrium models. 1. GROSS DOMESTIC PRODUCT There are three fundamental means of how to measure the GDP, which include the product approach, the income approach and the expenditure approach. Each approach gives a distinguished view of the economy. However, the basic principle underlying the national income accounting is that all three concepts provide indistinguishable measurements of the sum of current economic activity, except for problems such as incomplete data. The three methods of measuring GDP should give a similar value with minimal variations caused by statistical and data collecting differences. Additionally, among the three methods, the expenditure method stands as the most reliable approach due to data integrity. It is also the most commonly applied method. The product approach measures the monetary activities by totaling the market value of goods and services produced, isolating any products or services consumed in the intermediate stages of production. Also referred to as the Net Product or Value added method, the product measurement method needs three stages of analysis. First, it requires the estimation of the gross value of output from all sectors of the economy. Second, it involves the approximation of the intermediate consumption. That includes the cost of materials, services and supplies used in order to achieve the final product. Finally, it needs the reduction of gross output by intermediate consumption developing the net production (Mankiw, 2011). The income approach calculates economic activity by totaling all income attained by producers of output, including wages received by employees and profits gained by owners of firms. The sum of expenditures on all the final goods and services also count as income received as wages, profits, interest and rents. By adding all the profits, interest income, rents, wages one comes up with a Gross Domestic Product. The method commonly applies in the real estate and business appraisal. Under the income approach measurement method, there are three categories of calculation methods which include discounted cash flow, express capitalization and gross income multiplier (Mankiw, 2011). Finally, the expenditure approach involves the addition of all amount spent by users of the output. A method of identifying the GDP adds market value of all domestic expenditure made on final products and services annually. The expenditures include consumption, investment, government and net exports. The largest component of the expenditure approach includes household consumption. Government expenditure stands as the second largest component of the expenditure approach followed by investment expenditure and finally the net exports (Mankiw, 2011). What cautions should economists take while implementing GDP as an economic indicator? Economists need to take certain precautions while using GDP as an economic parameter. These safety measures depend on the approach used in calculating the Gross Domestic Product. While using the expenditure approach, a number of provisions need strict adherence. First, avoid double counting by excluding all intermediate goods and services. Second, government should eliminate expenditure on all transfer payments such as unemployment allowance, pensions and scholarships since they are not productive. Third, the government should not include any expenditure incurred while purchasing second-hand products because that expenditure is not present in produced goods. Finally, expenditure on old shares and bonds should also not count in the calculation of GDP since it is not payment of goods or services produced. The product approach also possesses a number of precautions, which need adherence. First, one should consider self-consumption while calculating GDP. Second, the economist should include the imputed rental value of the self occupied house. Third, to avoid double counting, one ought to exclude the sale of second-hand goods as an additional element in the summation of GDP. Fourth, a person should account for own-production by the household and the government while calculating national income. Finally, in totaling the Gross Domestic Product, economists should not consider intermediate goods as part of the additional elements (Rittenberg, 2011). Finally, while applying the income approach, some precautions need implementation. These safety measures include exclusion of transfer payments since they are unilateral payments. Second, there is the inclusion of the value of self-consumption and imputed rent of the self-occupied house. Third, economists should include the income tax imposed on personal income as it is part of compensation for employees. Fourth, windfall gains from activities such as lottery do not count in the calculation of Gross Domestic Product. Finally, like the other two approaches, economists should exempt income earned from the sale of second-hand products since they do not relate to the current flow of products and services. The field of economics does not consider GDP as a perfect indicator of standard of living. It does not adequately reflect the true health of the country and, therefore, needs replacement by a more comprehensive measure. GDP cannot be a good indicator of the standard of living of an economy due to a number of reasons. One, it is incomplete. The product part in GDP indicates that it is an output measure, but it excludes things like change in the value of non-market supplies and services such as fresh air and water. Such aspects functional in living standards are a part of the goods and services a population consumes and contribute towards the production. Two, GDP method does not measure aspects such as happiness and the health of a person, which is part of the standards of living of a human being. As a gross measure, it collects data for a geographical region ignoring individual preferences. It does not account for the worth of a nation’s assets or liabilities. Finally, GDP assumes that the value to users is equally proportional to the producer’s cost. For that reason, it is deficient since it prohibits changes in the amount of output produced per unit of input. It also assumes there is 100-% utilization of input, when this is not the case. For example, in many countries around the world, there is inefficient health and education. Teachers and students may not present themselves on a daily basis and occasionally people fall sick (GDP as a poor indicator of standard of living, 2012). From the information gathered above, it is apparent that GDP provides obsolete and incomplete data when used as a pointer to the standard of living. Reference List Akin, M. S. (2013). A Macro Economic Analysis of Child Labour in Sub-Saharan Countries. Developing Country Studies,3(7), 120-131. Blanchard, O. J. (2009). Macroeconomics (5th ed.). Upper Saddle River, N.J: Pearson Education. GDP as a poor indicator of living standards. (2012, November 11). InpaperMagazine, 0, 15. Matthews, R. (2012, September 19). GDP and the US Economy: 3 Ways to Measure Economic Production. Policy.Mic, 0, 1. Mankiw, N. G., & Taylor, M. P. (2011).Microeconomics (2.ed. ed.). Andover: Cengage Learning. Rittenberg, L., & Tregarthen, T. D. (2011). Principles of macroeconomics version 1.1.1. Irvington, NY: Flatworld Knowledge. Read More