Macroeconomics

Because things are scarce, societies are concerned that their resources should be used as fully as possible, and that over time their national output should grow. The achievement of growth and the full use of resources is not easy, however, as demonstrated by the periods of high unemployment and stagnation that have occurred from time to time through the world. Furthermore, attempts by government to stimulate growth and employment have often resulted in inflation and a large rise in imports. Even when societies do achieve growth, it can be short lived. Economies have often experience cycles, where periods of growth alternate with periods of stagnation, such periods varying from a few months to a few years. Macroeconomics problems are closely related to the balance between aggregate demand and aggregate supply. If aggregate demand is too high relative to aggregate supply, inflation and trade deficits are likely to result. •Inflation: refers to a general rise in the level of prices throughout the economy. If aggregate demand rises substantially, firms are likely to respond by raising their prices. After all, if demand is high, they can probably still sell as much as before even at the higher prices, and thus make more profits. If firms in general put up their prices, inflation results. •Balance of trade: deficits are the excess of imports over exports. If aggregate demand rises, people are likely to buy more imports. In other words, part of the extra expenditure will go on Japanese LCD TVs, German cars, French wine, etc. Also if inflation is high, home-produced goods will become uncompetitive with foreign goods. We are likely, therefore, to buy more foreign imports and people abroad are likely to buy fewer of our exports. If aggregates demand is too low relative to aggregate supply, unemployment and recession may well result •Recession: is where output in the economy declines: in other words, growth becomes negative. A recession is associated with a low level of consumer spending. if people spend less, shops are likely to find themselves with unsold stock. As a result they will buy less from the manufacturers, which in turn will cut down in production. •Unemployment: is likely to result from cutbacks in production. If firms are producing less, they will need to employ fewer people. Macroeconomics policy, therefore, tends to focus on the balance of aggregate demand and aggregate supply. It can be demand side policy, which seeks to influence the level of spending in the economy. This in turn will affect the level of production. Prices are employment. Or it can be supply-side policy. This is designed to influence the level of production directly: for example, by trying to create more incentives for firms to innovate.