The Production, Distribution and Consumption of Goods and Services - Article Example

Sanam Mukhtar Presented to Topic Macroeconomics February, 28, 2008 Macroeconomics Economics is that branch of social sciences that looks at the production, distribution and consumption of goods and services. The two main branches of economics are microeconomics and macroeconomics. Microeconomics deals with the decisions at small scale. For example, what to buy at the store, or how many products a company will make. The opposite is macroeconomics. Macroeconomics is that branch of economics in which we deal with the overall performance, nature, structure and behavior of a national or regional economy. It deals with the aggregated indicators such as price indices, GDP, unemployment, inflation, savings, investments, national income etc. It looks at prices of all goods and of all services. In short, it looks at whole economy. Macroeconomics also deal with the exchange rates. The higher will be the exchange rate, the lower will be the international demand due to expensive products. Macroeconomics deals with the critical economy issues such as inflation rate, unemployment rate, recession state etc. Recession is a period of two or more successive quarters of decreasing production. Scarcity of any resource becomes a cause of rise in price while access availability of any resource causes a fall in price of that commodity. Before we discuss U.S inflation, we must know the role of inflation. Inflation is basically an increase in average price level of a country while deflation is totally opposite to inflation. Deflation is the downward decrease in average prices level. Inflation in United States is also due to record oil prices that had increased the petrol price. Inflation is also caused by excessive money creation. Consumer Price Index (CPI), Consumption Expenditures Index (CPI) are tools to keep a check on average prices. One must thoroughly look into the average rise case because rise in the price of any one commodity may also cause a rise in price index. An average rise in the prices of food and beverages, apparel, energy prices, education, transportation, housing etc shows the horrible picture. As Inflation decreases the money value, countries consider it as a key issue. Change in prices of goods and services at domestic level is also measured by GDP deflator. Demand-pull inflation, Cost-push theory (Supply shock inflation), Money Supply etc are the causes of inflation in a country. Economy of United States is also known for being rich in mineral resources and fertile farm soil. Five large, inland lake flow along with the US border with Canada. That has been a reason of economic growth in the last few years and maintained a high overall GDP rate, a low unemployment rate but in the end of 2007, growth was hit by the troubles in the housing and credit market. Unemployment is also considered as one of the key factor in macroeconomics. Unemployment refers to people who are jobless and are seeking some work. The unemployment rate is obtained by dividing the number of unemployed persons by the number of persons in the labor force. It is mostly expressed in percentage as its value is less than one. It has been suggested that US growth could be cut to nearby 1.5% in 2008. Unemployment is also higher than it was at the end of the last boom in the l990s. The fall in the value of US dollar is also a hot topic nowadays. The Federal Reserve has cut rates in 2008 to control the situation. Investors seem least interested in dollar due to lower interest rates and due to significant trade deficit. America's economy is slowing and its overall GDP growth has fallen. Recession in US might be because US consumers stop spending. Rise in oil prices causes higher inflation. This is the case with all the countries. Specially, where oil use is key to their developing industrial and transportation sectors. United States remained successful in reducing their dependency on oil from a consumption-per-unit of output perspective. Michael Bowman described the current year status in one of his article as The Labor Department reports wholesale prices rose by one percent in January, double the rate that many economists expected. Overall, wholesale prices have risen more than seven percent over the last 12 months, the fastest pace since the late 1970s. He further added Aside from rising food and fuel prices, economists say many U.S. consumers are feeling "poorer" as home values decline. A new report shows, on average, U.S. home prices fell nearly nine percent in the final quarter of last year, the sharpest drop in decades. In recent months, the U.S. Federal Reserve has aggressively cut interest rates in an effort to spur a slowing U.S. economy. But Mark Vitner says that strategy could be undermined if inflationary pressures continue to grow. As we know, after the Second World War, the world and especially America experienced low unemployment figure. The study of Macroeconomics and implementation of plans to build up the economy of Unites States made United States one of the financially strongest countries in the world. Government uses macroeconomic tools that are actually policies, known as fiscal policy and monetary policy. These policies are used to influence the economy as a whole. Fiscal policy is basically the balance between taxation and spending. Fiscal policy has complete authority over taxation, spending and government expenditures. The president's administration in consultation determines fiscal policy. Monetary policy controls the money supply or in other words, it controls the availability of money and access to credit. It also controls discount rates, interest rates, exchange rates etc. Federal Reserve System (Fed) determines the monetary policy by selling or buying government bonds, influencing interest rates and lending or borrowing by commercial banks. As we know, U.S dollar is used in foreign exchange for the investment purposes in U.S financial markets by foreign investors. It generates high demand for U.S dollar. Interest rates in United States of America are comparatively high. Due to this, it negatively effects U.S agriculture exports. In USA, it has been observed that weakness in auto production has slowed the economy last years. High oil prices effected the auto industry while the demand is growing. It remained beneficial for foreign automakers. This factor will also affect the growth of U.S economy. Beside auto industry, rest industries have been doing well. That's the reason we might call U.S economy, a bi-model economy. Investment in Information Technology has been considered highly in U.S as nowadays telecommunication companies expand their networks to improve their productivity. Consumption preferences and choices change with the increase in income. Aggregate rise in income generates demand for high-valued goods. This way, demand for U.S goods increases resulting in higher farm prices. To identify a country's economy, one must focus on integration state of world markets. It is very important factor to identify the degree of integration imply for macroeconomic phenomenon. Works Cited Bowman, Micheal. US Economy Faces More Trouble Signs. 26 February 2008. Home page. 27 February 2008 Read More