Issues in Macroeconomics
The main issues in macroeconomics are:
- Employment and unemployment
- Stagflation and deflation
- Business cycles
- Economic growth
- The balance of payments and exchange rate
The main issues in macroeconomics are discussed below:
1. Employment and Unemployment
The major issue in macroeconomics is to explain what determines the level of employment and national income in an economy. Unemployment refers to the involuntary idleness of resources including labor. If this problem exists society’s actual output (GNP) will be less than its potential output. So one of the objectives of the government is to ensure full employment, which implies an absence of involuntary unemployment. Thus, the macroeconomic issue is what causes involuntary unemployment.
Classical economists denied that there could be involuntary unemployment of labor and other resources for a long time. They thought that with the flexible wage rates and interest rates, unemployment would be automatically removed and full employment established. But this did not appear to be so at the time of depression in the thirties.
Keynes explained that the level of employment and national income is determined by aggregate demand and aggregate supply. According to him, with the aggregate supply remaining unchanged in the short run, it is the deficiency in aggregate demand that causes unemployment in the economy.
2. Inflation or Rising General Price Level
Another issue of macroeconomic issues is to explain and analyze the problem of inflation faced by both developed and developing countries. It refers to a phenomenon of persistent rise in the price level. During inflation, some people gain but most people lose. Therefore, one of the objectives of the government is to ensure stability at the price level.
Classical economists thought that it is the quantity of money that determines the price level. According to them, the rate of inflation depends on the growth of the money supply in the economy.
But Keynes criticized the quantity theory of money and explained his own theory of inflation. According to him, just as unemployment is caused by the deficiency of aggregate demand, inflation is due to excessive aggregate demand.
3. Business Cycles
Throughout the history of economics, market economies have experienced what are called business cycles. Business cycles refer to the fluctuations in output and employment with alternating periods of prosperity and depression. The causes of these business cycles in the market economies are an important market economic issue. So in macroeconomics, we study the causes of business cycles and suggest remedial measures.
4. Stagflation and Deflation
Stagflation refers to a situation when a high rate of inflation occurs simultaneously with a high rate of unemployment. The existence of a high rate of unemployment means a reduced level of GNP. The term stagflation was coined in the 70s when several developed countries of the world, received a supply shock in terms of capsid hikes in oil prices. It is one of the important macroeconomic issues of the day perhaps the most complex. This problem could not explain with the Keynesian theory of effective demand (demand-side analysis). Therefore, a new economic thought emerged which is called supply-side economies. Every country in the world is struggling hard to fight this issue.
During the decade of 1930s market economies have experienced a greater economic problem, which has been described as depression or deflationary pressure. Deflation is a phenomenon of falling prices. In other words, deflation is the state of the economy where the value of money is rising or the prices are falling.
5. Economic Growth
Another important issue of macroeconomic issues is to explain what determines economic growth in a country. The problem of growth is a long-run problem, which Keynes did not take into consideration.
The expansionary trend in the country’s total output over a long period is known as economic growth. Growth is measured by the annual rate of increase of per capita income. It refers to a situation when the rate of increase in per capita income exceeds the rate of population growth. There are many theories and models on economic growth that explain how the steady growth of the economy can be achieved.
These theories also explain the causes of underemployment and poverty in less developed countries and they suggest the policies and strategies for accelerating growth in them.
6. Balance of Payments and Exchange Rate
From our list of 6 issues in macroeconomics, BOP is the last. Balance of Payments (BOP) is the systematic record of all economic transactions of the residents of a country with the rest of the world during the period. There may be a deficit or surplus in a BOP. Both create problems in the economy. The transactions in the BOP are influenced by the rate of exchange.
The exchange rate is the rate at which a country’s currency is exchanged for foreign currencies. The instability in the foreign exchange rate is a major problem, which creates serious BOP problems. Economists are always eager to discover the cause and effect of changes in a BOP. Thus, the equilibrium in BOP position and stability in the exchange rate are important macroeconomic issues.