You may have heard these facts before or this may be totally new information for you. Let me tell you that, the above three events are quite interesting. These facts may have contributed to the macroeconomy of that respective country in one way or the other. But life does not always bring all the good news to the market. There are some macroeconomics problems that can totally crash the Market. So in this article on Macroeconomics Problems, we are going to understand these issues in detail and how they affect the economy. So let’s first start by understanding the meaning of Macroeconomics.
Meaning of Macroeconomics
You must have heard of the term Microeconomics hundreds of time. So let’s now try to understand it in simple terms. Macroeconomics is focused on the movement and trends in the economy as a whole. It is the field of economics that studies the behavior of the entire economy. Thus we can say that it is that part of economic theory which studies the economy in its totality or as a whole. Let us now understand how it is different from Microeconomics. Microeconomics deals with individual economic units like a household, a firm, or an industry. On the contrary Macroeconomics deals with the whole economic system like national income, total savings, and investment, total employment, total demand, total supply, general price level, etc. In this article, we are going to study how these aggregates of the economy are determined and what causes fluctuations in them. What we are going to understand is the reason for the fluctuations and how to ensure the maximum level of employment and income in a country.
Importance of Macroeconomics
- It helps in understanding the functioning of a complex modern economic system. Macroeconomics gives us a clue into how the economy functions as a whole and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.
- In a certain way, macroeconomics does help in achieving the goal of economic growth, a higher level of GDP, and a higher level of employment.
- It also analyses the forces which determine the economic growth of a country. Understanding the macroeconomic problems gives a cue on how to reach the highest state of economic growth and sustain it.
- Bringing stability in price level and analysis of the fluctuations in business activities is another set of macroeconomic problems that are taken care of by a better understanding of macroeconomics.
- Macroeconomics helps in suggesting policy measures to control inflation and deflation.
- It explains factors affecting the balance of payment. It also identifies causes of deficit in the balance of payment and suggests measures for the same.
- It helps to solve economic problems like poverty, unemployment, inflation, deflation, etc. The solution for such macroeconomic problems is possible at the macro level only.
- A better understanding of the macroeconomics of the country helps to formulate correct economic policies and also coordinate with international economic policies.
Macroeconomics Problems: What are they?
Now that we have understood the meaning and importance of macroeconomics, let’s try to grasp some ideas about some common macroeconomics problems. In the earlier paragraphs of this article, we have heard some terms that are related to macroeconomics. Some of them were inflation, unemployment, the balance of payment, etc. So now let’s get to know them better. Have you ever tried to think of when these macroeconomics problems arise? To get your doubts clear let me share the answer with you. Macroeconomics problems arise when the economy does not adequately achieve the goals of full employment, stability, and economic growth. As a result of which there is a cascading effect that follows. Unemployment results when full employment is not achieved. Inflation creeps in when the economy falls short of the goal of stability. The phase of stagnant growth arises when the economy is not adequately attaining the goal of economic growth. All these problems are either caused by too little or too much demand for gross production. For instance, unemployment results from too little demand, and inflation emerge with too much demand.
Think that there are 4 boxes of a full-sized pizza, and there are 10 hungry moths that are ready to grab a bite. But only 4 of them get to have all 4 boxes of pizza. So rests of the six people are not utilized here in this eating completion. Though it’s a funny scenario, it can exactly be related to why unemployment creeps in. In the same way; unemployment arises when factors of production that are willing and able to produce goods and services are not actively engaged in production. Unemployment means the economy is not attaining the macroeconomic goal of full employment. Unemployment is a problem because:
- Less output is produced and thus arises the problem of scarcity in the economy.
- Due to this, the owners of unemployed resources receive less income. This gradually reduces the standard of living.
Thus unemployment rate ultimately tells us how many people from the available pool of the labor force are unable to find work. It is generally observed that when the economy witnesses growth from period to period, which is indicated in the GDP growth rate, unemployment levels tend to be low. This is because with rising (GDP levels, the output is higher, and hence more laborers are needed to keep up with the greater levels of production. Generally, the better the economy, the lower is the unemployment rate and vice-versa.
The consistent and persistent rise in the average price level in the economy leads to inflation. In simple words, during Inflation, there is a general rise in the price of goods and services over time. In such case, prices generally rise from month to month and year to year, and thus with this burden of inflation the economy does not attain its stability goal. Inflation leads to an average increase in prices. Here, some prices rise more than the average, some rising less, and some even decline. Inflation is a problem because:
- Since there is the rise in the price of goods and services, the purchasing power of money declines. This in turn reduces financial wealth and lowers living standards.
- Greater uncertainty surrounds long-run planning.
- Income and wealth tend to be haphazardly distributed among various sectors of the economy and amongst the resource owners.
So if you are an investor, be advised to watch for rises in the inflation rate.
Unemployment and inflation tend to arise at different phases of the business cycle. The probability of these problems will vary accordingly. At some times, unemployment is less of a problem and inflation is more. At other times, unemployment is more of a problem and inflation is less. Now we will understand how these two problems are connected to the two primary phases of the business cycle. Contraction Phase: During the contraction phase of the business cycle there is a general decline in economic activity. The overall aggregate demand is less which means that there is less output that is produced, and thus fewer resources are employed for the same. For this reason, unemployment tends to be a key problem here. But at the same time since markets tend to have more surpluses than shortages, inflation tends to be less of a problem during this phase. Expansion Phase: During the expansion phase of the business cycle there is a general rise in economic activity. Thus the overall aggregate demand increases leading to more production and the resources been employed at a higher level. Demand is more than the supply. Hence markets are more likely to have shortages than surpluses. Thus inflation tends to be the primary problem during this phase. However, with robust production, more people are needed to cope up with the Job demand and thus unemployment tends to be less of a problem.
Interest rates are the charges which are levied by the banks for lending a loan. As businesses borrow money from the banks from time to time, an increase in Interest rates will directly influence the business. The increase in interest rates will lead to an increase in interest expense. In such a case businesses will have to incur higher costs to repay the loan. Along with the businesses, interest rate changes also affect customers who in turn will affect the business. Individuals in such cases have to pay a higher amount to borrow the money, ultimately declining the demand for large products.
Stagnant growth occurs when the Supply of products is not increasing or it is decreasing below the benchmark. An increase in the total production of goods and services is generally needed for the growth of the economy. This is required to keep pace with an increase in the population and expectations of rising living standards. Stagnant growth exists if total production does not keep pace with these expectations. Hence the macroeconomic goal of economic growth is not attained. The probable reasons for stagnant growth can be associated with the quantity and quality of the resources used for production. So let’s understand the reasons in detail. The quantities of the four factors of production can restrict the growth of production. These factors are labor, capital, land, and entrepreneurship. If a lazy person decides to quit his job and spend his time doing nothing but sleeping on his parent’s living room sofa, then the total quantity of labor declines. Thus the quantity of labor is based on both the overall population and the portion of the population willing and able to work. If for example, Government regulations and High taxes discourage some industries to build new factories in the manufacturing sector, it will totally decline the quantity of capital. So this is all about the Macroeconomics Problems. If you have any further input on this article, you may notify me through the comments below this article. Learn the juice of this article in a minute through Macroeconomics problems Infographics
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