Thesis on "Macroeconomics and the Role it Plays in Economic Success"

Thesis 6 pages (2044 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Macroeconomics and the Role it Plays in Economic Success

Macroeconomics is the study of the aggregate or overall economic performance. Macroeconomics considers issues like gross domestic product -- GDP, aggregates of unemployment and employment, net exports, private investment, government investment and consumption, and consumer expenditures. Macroeconomics is also concerned with the interest rates, wage rates, general price level, inflation levels and the exchange rates. (Barro, 1997) Macroeconomics can play a major role in the economic success of a nation because it helps in the understanding and regulation of the various factors that play a major part in a country's economic performance. Macroeconomic theories can be used to explain the performance of macroeconomic variables and identify the relationships between the different variables in an orderly and logical manner. (Froyen, 2008)

Macroeconomic theories provide analytical tools and a framework which can help in the analysis of macroeconomic phenomena. Even though macroeconomic theories are not considered to be perfect, they do provide a lot of insight and understanding of the working of a nation's economy and the forces and factors that lead to undesirable and detrimental problems in the economy. Macroeconomics presents a strong framework for finding out the reasons and outcomes of economic troubles like inflation, depression, recession, stagflation, and unemployment and also helps in determining suitable measures to counter such problems. Desired goals can be achieved for the success of a nation's economy by regulating and controlling those factors of the economy which have been revealed by the study of the macroeconomics of the country. (Froyen, 2008)

Macroeconomics can prove to be useful for determining the economic well being of both poor and rich consumers who are affected by movements in rate of inflation, interest rates and exchange rates. When a nation's economic environment undergoes a change, all kinds of business have the possibility of either gaining or losing large amounts of money even if they have an extremely effective management at the helm. Macroeconomics helps businesses to stay prepared for such situations. Macroeconomics also has a role to play in the political process of a country which eventually contributes to the nation's economic success. It gives an idea to the voters about the intentions of the government as well as helps the government to avert economic crises like hyperinflation or depression. These extreme economic calamities which can wreak havoc on the society can be prevented if those at the helm of government decision-making put relevant economic principles into operation. Properly implemented policies which take macroeconomic models into account can in turn leads to economic success in the country. ("Part I: Introduction to Macroeconomics," n. d.) Economic success or growth refers to the "long-term expansion of the productive potential of an economy." A prolonged period of economic growth results in rise in employment levels, higher business confidence, higher fiscal dividends, investment accelerator effect and a higher standard of living. ("As Macro-Economics/International Economy," n. d.)

Economic success is one of the most fascinating aspects of macroeconomics. Some of the aspects in the study of macroeconomics which contribute to the economic growth of a country include increase in population. A positive rate of population increase means more people will mean more output in production. Another factor is accumulation in the means of production like communication networks, roads, plant and equipments, and other types of infrastructure which contributes to better productivity of workers. An additional and important factor of economic growth is the advancement and utilization of knowledge to realize economic gains. The last two centuries have witnessed a fast pace of scientific discoveries and technological innovation which initiated the industrial revolution and later the age of information technology. However, economic growth is not a steady factor and there have been prolonged periods of ups and downs. Such periods are referred to as business cycles. One of the main challenges that macroeconomics faces is to clarify why these fluctuations of GDP from the ongoing trend occurs, why they persist for a certain period of time and what measures can be taken to get around the disruptions that accompany such fluctuations.. ("Part I: Introduction to Macroeconomics," n. d.)

Short-term economic growth can be determined by the annual change percentage of real GDP. ("As Macro-Economics/International Economy," n. d.) "Macroeconomic short-run" is basically the period of time when capital stock and technology remain constant. The pace of change of capital stock and knowledge is very slow as compared to the speed with which other significant macroeconomic phenomena change. When capital stock and technology remain constant, the output level that an economy can achieve depends on the level of employment. Therefore, short-run macroeconomics involves employment stabilization around the level of full employment -- a situation where all those who want a job can obtain one, finding out the average price level, and the behavior of different items in the balance of payments of the economy. "Macroeconomic long run" is the period of time which is long enough to allow a change in capital stock and technology to take place. Thus, long run macroeconomics involves determination of the reasons and processes by which an economy's productive capacity level or potential GDP changes over a period of time. Therefore, when we talk of economic growth or success, we are basically talking of the increase in a nation's economic capacity or productive capacity regardless of its usefulness. (Montiel, 2003)

GDP is the commonly used gauge of a country's economic success. GDP basically assesses the output of final goods and services of a nation's economy. GDP is measured in terms of the prices of a given year -- real GDP or in terms of current prices -- nominal GDP. For calculating nominal GDP, total output is measured using the prices for each year. An economist can pinpoint the changes that occur in output vs. The changes that occur in price levels by measuring output with prices for a given year. The capability of an economy to produce increases with time when it is accompanied by technological change and capital accumulation, which in turn improves labor productivity and increases labor supply. (Diulio, 1997)

Macroeconomics is closely linked to governmental policies and politics which in turn can affect the economic success of a nation. At the most basic level, macroeconomics involves categorizing events into two groups: the ones that influence the demand for services and goods and the ones that influence the supply of those services and goods. The spending decisions of domestic and foreign economic agents -- government agencies, firms and households constitute the demand side. The basic tenet of the policies of aggregate demand management is that actions can be taken by the government to balance or compensate for the actions of private agents like households and companies in order to remove or dampen the ups and downs in total spending. ("Part I: Introduction to Macroeconomics," n. d.)

The basic motive here is to tone down the effects of booms as well as recessions. Two traditional tools used by a nation for demand management are fiscal policy and monetary policy. Fiscal policy controls government taxes and expenditures so as to influence the amount of national spending. Monetary policy basically influences exchange and interest rates and other conditions of the financial market which in turn have an impact on the spending on services and goods. ("Part I: Introduction to Macroeconomics," n. d.) Economic growth and stability are all the more important to nations of the developing world. Therefore, fiscal and monetary policies based on macroeconomic measurements and studies that are followed by their governments can make a lot of difference to their economies. Many of these governments followed conservative policies under the aegis of the IMF which were later criticized by a number of experts for having misguided and impeding economic growth in these countries. (Stiglitz; Initiative for Policy Dialogue, Ocampo; Spiegel; Ffrench-Davis; Nayyar, 2006)

The productive potential of an economy constitutes the supply side. An economy's aggregate supply is influenced by factors like working hours of households, their labor productivity and the effectiveness of allocating those resources which generate the output of a nation. Therefore, a government's supply side policies signifies its efforts to decrease or eliminate "government induced inefficiencies" which were put into effect before the macroeconomic effects of the supply side policies were comprehended or because of the influence of interest groups in or outside the government. The supply side policies are also concerned with putting underutilized or inactive resources to economic uses. These macroeconomic policies undertaken by the government can help in the improvement or deterioration of the economic climate. One of the main components of supply side is the unemployment policy. Another factor which affects the macroeconomics of a country is its degree of openness. A large number of countries have opened up their economies in the recent past and therefore are no longer immune to the events which occur externally. ("Part I: Introduction to Macroeconomics," n. d.)

One of the major macroeconomic theories is the Keynesian theory which lays emphasis on the role that the government can… READ MORE

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