It is primarily focused on the aggregate economic agents that share common features (Kunst, 2006). Economists have become more interested in knowing the factors that contribute towards the economic growth of countries. A country’s economic progress determines employment, goods and services in the economy, and the people’s standard of living. In macroeconomics, progress is achieved by testing particular theories to see how the economy functions, and it is used to forecast the effects of a particular policy and the event that was carried out. However, in this paper, the basic concepts of macroeconomics and their influence on the national economy are discussed.

What is Macroeconomics?

Macroeconomics is a branch of economics that studies the aggregate performance, behavior, decision-making, and structure of an economy, which includes national, regional, and global economies. In other words, it is one of the two main components of economics that studies major economic aggregates. For example, the reaction of citizens to an increased rate of unemployment is a macroeconomic problem. Macroeconomics tries to investigate aggregate behavior by applying essential assumptions without abstraction from the essential features (Kunst, 2006). These assumptions are used to create macroeconomic models, which have three phases: a story, a mathematical model, and a graphical representation. Macroeconomics is non-experimental as in the case of history, i.e. it cannot conduct scientific experiments, but rather focuses purely on observations. Although historical episodes permit diverse interpretations, many conclusions of macroeconomics are not coercive (Kunst, 2006).

Basic Concepts of Macroeconomics

Macroeconomics involves varieties of variables and concepts, but there are four main concepts of the macroeconomic research. Macroeconomic theories usually relate to the concepts of price, inflation, output, and unemployment. These concepts are also extremely important to all economic agents, including consumers, producers, and workers.

Price

In the ordinary form, price is the quantity of compensation or another payment from one party to another in exchange for goods or services. In modern economics, it is generally expressed in the form of currency, which is requested by a seller of goods or services. Also, some economists define price as the ratio of the quantities of goods exchanged for each other.

In a free market economy, economic theory asserts that the market price of goods and services reflects the relationship between demand and supply. Price is set to equate the quantity demanded and the quantity of goods and services supplied. Nevertheless, the mentioned quantities are defined by the marginal utility of the assets to different seller and buyers. However, when a product or commodity is being sold at different geographical locations, the law of one price is believed to be generally applied.

Inflation

Inflation is often referred to as the expansion in monetary circulation and more precisely as the increase in the quantity of money in relation to the velocity of its circulation, MV in short. However, M is referred to as the currency outside bank plus demand deposits, while V is referred to as the so-called income velocity of money, i.e., the average time a unit of money is used for income payments within a year (Haberler, 1960).

Historically, distinguished economists argued that for the sake of long-run stability, growth, as well as for social justice, prices should be allowed to fall when there is a decline in the average cost of production as a result of technological improvements. In other words, inflation should be avoided in the case of a rise in money income or expenditure. On the contrary, it is difficult to say whether the combination of constant money wages and falling prices is more favorable for economic stability in comparison to that of a constant price and increasing money wages (Haberler, 1960).

Output

Output is the total value of the nation’s produce within a given period of time. Output is generated when things are produced and sold. Output is usually considered as being equivalent to income. It can be measured as total income, the total value of final goods and services, or the sum of all value added to the economy. National output is usually measured using the Gross Domestic Product (GDP). Economic output has increased over time due to the advancement in technology, accumulation of capital and machinery, as well as access to better education and human capital. However, since the increase in output is not always consistent, business cycles sometimes cause short-term drops in output, which is referred to as recession.

Unemployment

Unemployment refers to the inability to obtain employment that generates wages or salaries paid in money. It has a tremendous social and economic effect on the society and also on the jobless because it causes permanent losses of the output of goods and services. Unemployment brings about financial insecurity, which results in the poverty, indebtedness, criminal activities, family disruption, ill health, suicide, homelessness, drug addiction, school dropouts, as well as other social problems (Forstater, 2002). It also destabilizes business expectations due to the fear of low demand and cool private investment. However, unemployment generally leads to the deterioration in labor skill, which results in lower productivity growth. Some of the economic causes of unemployment are a result of structural change problems and effective demand problems, as well as some political factors.

Nevertheless, it is believed that unemployment serves several purposes. First of all, it provides the system with a pool of available labor force in the case of increase in the pace of accumulation. Secondly, it serves to discipline workers who do not fear being laid off in situations of full employment opportunities. Thirdly, it is one of the ways through which workers are being disciplined by decreasing their bargaining power, hence keeping their wages from rising (Forstater, 2002).

Unemployment can generally be divided into different types based on their causes. Structural unemployment refers to the unemployment caused by a mismatch between workers’ skills and skills required for open job opportunities. Classical unemployment is the result of a situation whereby wages are too high for employers to afford hiring more workers. Nevertheless, other types of unemployment may be a result of the economic condition such as cyclic unemployment, which occurs when the growth stagnates.

Macroeconomic Models

In macroeconomics, various models have been developed in order to explain the relationship between input and output in the economy. I want to write my coursework  on this topic too. 

Growth Models

The growth model is the model used to explain economic growth in the long run. It begins with a production function where the product of two outputs (capital and labor) is the national output. It is assumed in this model that the capital and labor are used at constant rates without any fluctuations in unemployment and the utilization of capital, which is commonly seen in business cycles.

Aggregate Demand - Aggregate Supply

The aggregate demand - aggregate supply model shows the level of real output and the price level based on the equilibrium in aggregate supply and aggregate demand (Gal? Gertler, 2007) as shown in Figure 1 below.

Figure 1. Aggregate demand - aggregate supply curve.

As seen on the graph, the downward slope is as a result of three effects: the Keynes or interest rate effect, which explains that as price decreases, the demand for money also decreases, causing the decline in interest rates and the increase in borrowing and consumption; the Pigou or real balance effects, which states that real wealth increases as a result of the fall in the real price, hence, consumers demand more goods; and the net effort effect, which explains that as price increases, domestic goods become relatively more expensive to foreign consumers; hence, there is a decline in exports.

Macroeconomic Policies

Macroeconomic policies are usually implemented using two sets of economic tools, which are used to stabilize the economy.

Fiscal Policy

The fiscal policy describes the relationship between government revenue and expenditure. A good balance between these two elements is very important because they are the instruments that influence the economy. When government expenditure exceeds the revenue (income tax collected), the government suffers from the budget deficit. On the contrary, when government revenue exceeds its expenditure, the government will have a budget surplus.

Monetary Policy

The monetary policy explains that changes in the money supply generally influence important macroeconomic variables such as labor force, inflation, national output, interest rates, foreign currency exchanges, and share prices. This policy is usually controlled by the central bank acting as the government agency (Gal? Gertler, 2007).

In conclusion, macroeconomics is a branch of economics that studies the aggregate performance, behavior, decision-making, and structure of an economy, which includes national, regional, and global economies. Macroeconomic theories usually study the concepts of price, inflation, output, and unemployment. These concepts are also extremely important to all economic agents, including consumers, producers, and workers. Also, as discussed earlier, various models and policies have been developed in order to explain the relationship between input and output in the economy.