Periods of Macroeconomics History - Essay Example

Mohammed Alkuwari Spring ECO 201,005 DR. Martin Sabo Macroeconomic This paper argues that history of macroeconomics can be categorized into three periods. These periods are pre-1940, from 1940-1980 and late 1970s. Pre-1940 refers to the period when there was no proper integrated framework. This was a period when a lot of explorations were done and all the necessary ingredients came into existence although confusion reigned as well .The second period in macroeconomics is the period from 1940-1980. It was during this period that an integrated framework was developed including development from IS-LM to dynamic general equilibrium models. The third period in macroeconomics started in year 1980, which was a fresh period of explorations .More emphasis was put on the role of imperfections in macroeconomics. This was one of the most fruitful periods of research in macroeconomics. Introduction To understand Macroeconomics, the knowledge of microeconomics is essential because macroeconomic behaviors are the totality of all microeconomic decisions made by individual firms and households. Macroeconomics is one of the two branches of economics. It deals with the entire economy rather than individual markets. Macroeconomics deals with the study of behavior, structure, performance and decision making of the entire economy including regional, national and global economy. It deals with trends and movements in the whole economy. Study of macroeconomics encompasses the study of government policies meant to make the economy steady. Additionally, it studies the control of the economy over time thereby reducing fluctuations in the economy. Besides, macroeconomics is the study of monetary policies, fiscal policies and supply side economics. The main goals of macroeconomics are full employment, economic growth and stability. An economy experiences full employment when all available resources are used for production of goods and services in the entire economy. Resources in the economy can be in terms of labor, capital, land and entrepreneurship (Dwivedi, 198). When the economy is fully employed, the scarcity problem is reduced and goods and services produced satisfy needs and wants of the people. Stability is achieved by minimizing fluctuations in prices, employment and production in the whole economy. The essence of maintaining stability is to avoid disruptions and uncertainties in the economy. Stability ensures that consumers and producers’ long-term consumption and production plans are met (Dornbusch, 73). Economic growth is achieved by increasing the economy’s ability to produce goods and services. This impacts positively in the economy by increasing living standards, producing more goods that satisfy needs and wants and easing scarcity. The pursuit of these macroeconomic goals is essentially an act of normative economics. Macroeconomics is the same in all countries. The major variables describing macroeconomics and the major policy approaches are similar in all aspects. What differs is the quality to which these policies are applied from one state to another. This situation holds because political processes from which these policies come out are distinctive to each state. The above macroeconomic goals are achieved through monetary, fiscal policies and growth or supply side policies. Fiscal policies refer to policies concerning expenditures and taxes while monetary policies are tools used to control the amount of money in the economy. It includes open market operations, interest rates and discount window rate. Supply-side policies are policies used by the government to focus on stimulating aggregate supply. Macroeconomics was first introduced in the year 1936 by an English economist by the name John Maynard Keynes. According to Keynes, level of aggregate demand for goods and services determine the level of employment in the economy. Keynes argued that the market is unable to accumulate enough capital to sustain investment at full employment level unless there is periodic quick increase in government spending. Macroeconomics is said to be a typical public good because it has the distinctive features of non-exclusive and non-divisibility. The process of gathering, analyzing and distributing information that goes into the making of policies in macroeconomics is costly as thousands of workers are hired. In addition, all enjoy the effects of a stable economy: producers, consumers and the government. Economic Indicators of macroeconomic variables signal the current trends in the economy. For instance, the government must study, analyze and understand the main variables that determine the current behavior of the macro-economy in order to do a high-quality job of managing the whole economy. The government needs to understand the forces of economic growth including when inflation or recession occur and predict these trends, as well as what combination of policies suitable for rectifying the ills in the economy. There are three types of markets in Macroeconomics: goods and services, the labor market and the financial market. Interaction of economic agents occurs through these three types of markets. The goods and services markets comprises of both foreign and domestic firms, producing services and goods that are consumed by consumers and the government in return for a payment in form of revenue. Labor market consists of household supplying labor input to firm and government in return for a payment in terms of wages. Money market refers to the flow of financial assets linking firms, foreigners and households. Households supply financial resources to this market in the anticipation of earning income, and borrow liquid assets from this market. The rest of the world, government and firms also engage borrowing and lending from this market harmonized by financial institutions. Aggregate indicators in macroeconomics include unemployment rates, price indices and GDP. These indicators are used to understand the functioning of the whole economy. Macroeconomics makes broad application of economic models that explain the relationship between such factors as international finance, international trade, savings, inflation, unemployment, output, consumption and national income. Macroeconomics deals with various types of concepts including output, inflation and unemployment. National output is also referred to as national income. Another name of Gross Domestic Products is national income and is defined as total value of everything produced and sold by a country in a given period of time usually a year (Colander & Edward, 32). Unemployment is measured by unemployment rate and is defined as the fraction of workers without jobs in the labor market. Persons who are discouraged from seeking job by a lack of the required skills, retired and pursuing education are not included in the labor force market. There are different types of unemployment relating to different causes including classical, frictional and structural. Inflation refers to increase in general price level in the whole economy. A decline in the economy is deflation. Inflation is estimated in terms of fluctuations in price level in economy in price indexes. Macroeconomics comprise of four components: household, firms, which together compose the private sector, the government or public sector and the rest of the world or international sector. Household refers all consumers, all people and every member of the society. This component includes the whole, wants-and-needs satisfying breathing, eating and consuming population of the economy. The firms refers to the private, profit seeking entities in the entire economy that merge limited resources into the production of wants-and-needs fulfilling goods and services. It includes, partnerships, proprietorships and corporations .The government component include all government entities that affect allocation of resources in the economy. It consists of three levels of government including federal, local and state responsible for enforcing and passing laws of a country. The foreign sector is made up of governments, businesses and citizens of other countries. The interaction of the above components of macroeconomics can be presented in at the circular flow diagram as follows. The Circular Flow Diagram The circular flow takes place between inputs and output markets. Copyright © 1995-2010, Pearson Education, Inc., publishing as Pearson Prentice Hall Legal and Privacy Terms The Circular Flow of Payments In the diagram above households labor for the government and firms in the economy receiving wages in return for labor supply. Besides, households receive dividends, rent, profits and interests from firms on their company ownership, land use and investment in stocks and bonds .Households receive interest from buying of government bonds and transfer payments including welfare and social security. It is also illustrated that government, households and foreigner purchase goods and services from firms. In addition, the diagram indicates that firms and households pay taxes to the government. Finally, it clearly depicts that households purchase goods and services from foreigners. Macroeconomics greatly makes use of macroeconomic theories to deal with economic problems of the day. Some of the theories developed over decades include classical theories, Keynesian theories, aggregate market analysis, IS-LM analysis, monetarism, and new classical economics .The classical macroeconomics theory came from the work of Adam Smith. This theory is based on the opinion that variable prices ensure market equilibrium such that full employment is maintained in the economy. The implication of this theory is that government intervention is not necessary to retain full employment. Keynesian theory was developed by John Maynard Keynes who argues that the main source of business cycle instability is aggregate demand for production. This theory implies that government intervention in essential for economic instability. The aggregate market analysis helps to give clearly explain the stagflation including high rates of both unemployment and inflation. This theory can be used to explain the current state of the art of Macroeconomics. Monetarism places the quantity of money that circulates around the economy as an essential factor that determines macroeconomic instability (Dwivedi, 37). New neoclassical economics assumes that individuals have rational expectations about the effects of policies implemented by the government, which then have a negative impact on the policies. The economic implication of this policy is that the economy itself maintains full employment without the need for government intervention. The IS-LM analysis integrates product and money market. It represents the role played by interest rates and money market in macroeconomic activities. Conclusion Macroeconomics is the study of economics from a wider perspective and it deals with human issues and the manner in which they apply to the real world. Decision makers in many sectors of the economy and the government use Macroeconomic as well. Suggested Areas of further research in macroeconomics Research should be made on the steps that could be taken to enable a strong evaluation of any business economy and the macroeconomic effects of museums to producing even more robust estimates of arts and culture. Besides, research should also be made on the procedures to facilitate better measurement of spillover effects of culture and arts. Moreover, study should be made to have a better understanding of the impact of reduction in public funding in the whole economy. Further research should be made on the ultimate effect of loosening credit standards on the households and how trade between a particular state and other countries affect the whole economy. America economy was hit by a great housing crisis in 2007, an economist can discuss what the government is doing to ensure it does not happen again and what are some of the reasons why the crisis happened. Works Cited Colander, David C, and Edward Gamber. Macroeconomics. Cape Town: Pearson/Prentice Hall, 2006. Print. Dornbusch, Rudiger. Macroeconomics. North Ryde, N.S.W: McGraw-Hill Australia, 2006. Print. Dwivedi, D N. Macroeconomics: Theory and Policy. New Delhi: Tata McGraw Hill Education Pte Ltd, 2010. Print. Read More