Macroeconomics: Concepts and Variables
Macroeconomics is a branch of economics that deals with the economy as a whole. It takes into consideration the performance, behavior and structure of the economy as a whole rather than the individual components or firms (Microeconomics). Thus, Macroeconomics contains the study of the aggregated concepts like National Income, GDP, Unemployment, Aggregate Demand, Aggregate Supply etc. Macroeconomics plays a major role in helping the government to formulate the economic policy for the nation.
What are the basic objectives of Macroeconomics?
The basic objective of Macroeconomics is the Economic Growth of the nation, This Growth can be achieved by achieving the following goals:
- Reduction in the Unemployment Rate
- Stabilization of the prices in the economy
- Maintaining the Balance of Payments
- Stabilizing the Economic Growth Rate
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Components of Macroeconomics: There are two main components to Macroeconomics which lay the foundation for the study of concepts of Macroeconomics. Macroeconomics deal with the economy as a whole which is why we take into consideration the aggregate of all variables of Macroeconomics. The main two components are:
- Aggregate Demand
- Aggregate Supply
Aggregate Demand: Aggregate Demand refers to the total demand in the economy for the final goods and services at a given period of time at a particular price. This is also called Domestic Final Demand or Domestic GDP. The Aggregate Demand shows the different quantities that can be purchased at different possible prices.
The main components that form Aggregate Demand are:
- Consumption: Consumption refers to the final goods and services consumed by the Households in the economy. This forms the largest proportion in the Aggregate Demand of the Economy.
- Investment: Investment is considered to be the most volatile component in the Aggregate Demand’s composition. It is the spending by the firms in their capital.
- Government Spending: The government Spending involves the expenditure made by the Government. This includes Transfer Payments, Capital Spending etc.
- Net Exports (X-M): Net Exports refer to the excess of the exports over imports. The increase in the Exports will increase the consumption of the domestic product so as to be exported. “X” refers to Exports and “M” refers to Imports.
Thus, we have, AD = C+I+G+(X-M) where, AD- Aggregate Demand C- Consumption I- Investment X- Exports M- Imports
Aggregate Supply: Aggregate Supply refers to the total supply of the final goods and services in the economy by the suppliers. It is the quantity that the suppliers or the firms are ready to supply in the economy at a given period of time at a particular price. The supply by all the firms in the economy is summed up while determining the aggregate supply.
The main components that form Aggregate supply are:
- Consumption: Consumption refers to the goods and services that are consumed by the households. This is the basic part of Aggregate supply.
- Savings: Savings refer to the part of income that is saved by the households or the firms and which is not put into the investment sector.
Thus, we have, AS = C+S Where, AS- Aggregate Supply C- Consumption S- Savings
Concepts of Macroeconomics:
Macroeconomics is a wide subject and can be correlated to several ideologies and concepts. But usually it is linked up and studied with relation to the following three concepts:
- Output or Income
- Inflation or Deflation
Output or Income: Both Output and income are interchangeably used in macroeconomics. Both are correlated to each other, Income is generally directly proportional to the level of output an economy produces. The level of output determines the level of Gross Domestic Product. This GDP is used in the measurement of the efficiency of the economy’s functions. Thus, it serves as one of the vital concepts of Macroeconomics.
Unemployment: Unemployment is one of the major issues that macroeconomics deal with. Unemployment refers to the number of people who are willing to work but do not have any job. Macroeconomics aims at full employment of the resources and the people present in the economy to achieve maximum production.
There are two approaches to the study of employment:
- Keynesian Approach: According to the Keynesian approach; the resources are not fully employed in the economy and the supply can be fully elastic till the point the resources are completely employed. Once the resources are fully employed; the production can no more be increased.
- Classical Approach: According to the Classical Approach, there is full employment in the economy at any point of time. Thus, there can be no increase in the supply or production in the economy, any increase in the aggregate demand will render a rise in the prices.
Inflation or Deflation: Inflation refers to the rise in the prices of the goods and services in the economy and Deflation refers to the decline in the prices of the goods and services in the economy. Usually the rise in the prices i.e. inflation leads to the growth in the economy where as the deflation leads to a downfall in the growth of the economy. The economists generally try to maintain the level of prices in the economy so as to maintain a balance. This is being done by using various monetary and fiscal policies.
Variables of Macroeconomics:
The Macroeconomics is mainly based on the concepts. The variables which are used in an elaborative study of Macroeconomics usually consist of the concepts only. The various variables are:
- Gross Domestic Product (GDP)
- Unemployment Rate
- Inflation Rate
- International Trade.
Thus, all these factors influence the state of economy.
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