How Economists Measure A Country’s Macroeconomy: Components And Economic Problems

Assignment Details: Discuss how economists measure a country’s macro-economy. Include in your discussion a detailed description of each of the four major components.

1. Identify the broad range of economic problems facing modern societies 
2. Demonstrate understanding of micro and macroeconomic principles and their effect 
3. Demonstrate understanding of elementary economic theories and their application to economic problems 
4. Evaluate conflicting claims about the economy 
5. Examine government economic policies and assess their impact on the domestic economy 

Introduction:

A country’s macro-economy indicates its economic performance, behavior, structure and decision making as a whole. Economists measure a country’s macro-economy by analyzing aggregate indicators which may include the gross domestic product, price indices, unemployment and the interrelationship between different economic sectors. Macroeconomic performance is reflected in the manner in which the set objectives and government policies are achieved (Saviotti & Pyka, 2009). There are four key economic elements which are actually considered in the measurement of a country’s macroeconomic performance. They include the economic growth which is reflected by the real gross domestic product growth, inflation rates, the rate of unemployment and the balance of payments (Fukuyama, 2015). Considering the macroeconomic factors, an economic is said to be growing if the four factors mention above are favorable. An economic growth occurs if the gross domestic product grows with time, inflation rates are low (actually a better performing economy should set a target of not more two percent level of inflation), unemployment rate decreases (this means that the economy is doing well as it is able to create jobs for its citizens as well as the outsiders) and the balance of payments are favorable (this means that the government debt both internally and externally is low). The most crucial statistic in every country is the country’s economic growth as indicates the direction (whether positive or negative) of growth of the country’s economy and its international competitiveness considering the other countries level of economic growth. The major goal of every country is to improve its economic to a world class level where all the four key economic elements and other contributory factors are favorable (Perrow, 2016). However the achievement of this depends on various factors the most crucial ones being the manner in which country’s budgeted expenditure is utilized and the achievement of the set economic goals and government policies. To achieve and maintain a positive economy is not an easy task but with dedication, integrity and accountability of every citizen this is possible.

Today’s society faces many economic problems. The major issue arises due to the fact that resources available are scarce while the human wants are unlimited (Miller & Rose, 2017). The major issue of concern in most societies is how to efficiently allocate the scarce resources to satisfy the unlimited wants and problems faced in the societies. Most of these economic problems are worse in developing countries as compared to developed countries. Some of the economic problems include unemployment, higher rates of inflation, unfavorable balance of payments, the volatility of exchange rates, inequality in distribution of income and corruption and embezzlement of public funds.

1. Unemployment

Unemployment refers to a situation whereby individuals who are qualified, willing and actively seeking for jobs are not able to find them. In the modern society, this has become one of the major economic problems not only to the less developed countries but also to the developing and developed countries. One of the major causes of unemployment is the changes in business cycles mostly the recession times of an economy (Sachs & Warner, 2015). Recession in an economy refers to a situation whereby the economy is depressed and the demand for goods and services during this period is low. Due to these bad economic times, most workers are laid off as most businesses in the economy make losses and hence face the problem of settling salaries and some other business expenses. Unemployment may also be caused by lack of relevant skills required in the job market. Most of developing and less developed countries face a situation where their level of education is relatively poor compared to developed countries. The education offered in most of these countries is of poor quality and irrelevant as compared to skills required in their areas of expertise. Most industries are reluctant to employ those who lack relevant skills to their operations and as a result the level of unemployment increases. Jobs are available but individuals lack relevant skills required by the industries. Generally, the measurement of the macroeconomic performance in a given country considers the level of unemployment. An economy which has low rate of unemployment is said to be doing well as it can create jobs both internally and externally and hence improve individuals’ living standards. The modern society faces the problem of unemployment as most people ranging from skilled, semi-skilled and unskilled are unable to find work. This should be the major issue of concern by the government in these societies and should work towards eliminating or minimizing this problem in order to improve the individuals’ living standards and the entire economy.

Unemployment

2. Inflation

Inflation refers to a situation whereby the general prices of goods and services rise over a given period of time (Burdekin & Burkett, 2009). This is one of the major problems in the modern society. It creates future uncertainty in as much as investment is concerned. This may force most investors not enter the market due fear of the unforeseen future. Also, if the employees’ salary is not adjusted accordingly, they end up experiencing a decline in their standards of living and consequently their level of expenditure declines. The entire economy may end up declining as a result. The government should adequately address this problem and if any inflation occurs, then it should not exceed two percent.

3. Unfavorable balance of payments

Most economies in the modern society are faced with the problem of a deficit in the balance of payments (Allen, 2009). This means that they are more into import than exports. To most developing economies this may not be a problem however some developed countries have faced this problem and they have ended up solving it mostly by borrowing and as a result their currency has ended up losing its value.

4. The volatility of exchange rates

Some countries in the modern society are uncompetitive in terms of their currency. Their currency is of low value as compared to others. Most developing countries have faced this problem and hence they may end up not participating in the exports market (Sercu & Vanhulle, 2012). Inflation in the modern society has highly contributed towards this and it needs to be addressed by the concerned authority for a better future.

The economic performance of every nation is determined by its adherence to certain set goals and objectives which are governed by economic principles both at micro and macro level. Microeconomics examines the behavior of specific sectors of the economy at individual level (Lopus & Maxwell, 2015). The microeconomic principles govern the behavior of the individual sectors of the economy by analyzing various market mechanisms in order to establish reasonable prices for the available goods and services. The microeconomic principles also deal with mechanisms which aim at how best individuals and business firms can utilize the available scarce resources by making informed decisions on the allocation measures of the scarce resources. Resources are scarce in nature and therefore need to be utilized maximally for realization of better results. Individuals react differently to changes in various sectors of the economy. This individual behavior is encompassed in the microeconomics and various business firms within every economy ought to consider various microeconomic principles which explain this behavior to ensure that their service standards comply with them to avoid future losses.

Macroeconomics examines the economy of a given country as a whole. The macroeconomic principles aim at promoting growth of the entire economy by regulating various operations within the economy (Poovey, 2014). Macroeconomics puts into consideration four key elements which include the gross domestic product (GDP), unemployment, inflation and the balance of payments among other. Macroeconomic principles aim at regulating these key elements and other determinant factors to foster economic growth. A positive economy with a bright future has its gross domestic product improving with time, low levels of unemployment as the economy creates jobs for its citizens, low inflation rates which actually should not exceed two percent and favorable balance of payments. The balance of payments is examined in the way a given nation trades internationally. A country whose international trade does well has invested much in the export market as compared to its imports.

Inflation

The micro and macro-economic principles are interrelated and both aim at fostering the growth of a country’s economy (Ferreira & Litchfield, 2011). The performance of the individual firms which is governed by the microeconomic principles contributes much towards improvement of the entire macro-economy. Both the principles improve the entire economy by coming up with mechanisms of resource allocation by individual business firms in the economy, creating jobs for the entire nation, minimizing the level of inflation and improving the current account of the balance of payments of a given country. Both regulations of the principles help in improving the gross domestic product of a country which is an indication of excellent performance of the entire economy. A successful economy puts into consideration both the micro and macro-economic principles.

Economic theories explain certain behaviors in an economy and mechanisms which either influence or solve certain problems experienced in an economy (De Marchi & Blaug, 2013). The elementary economic theories explain the existence of certain problems in the economy and provide ways in which these problems can be solved accordingly. Some of the major elementary economic theories include the classical and new classical theories, Keynesian and new Keynesian theories and the monetarism theory. All these theories explain economic behavior and mechanisms which should be undertaken in case of deviance.

The monetarism theory helps to deal with the problem of inflation in an economy. It examines the role played by the government and the central banking of every nation in controlling the amount of money that actually circulates in an economy (Sosin, Lecha, Agarwal, Bartlett & Daniel, 2014). The supply of money in an economy influences both the total output of a country and the prevailing market prices. Too much money in the economy brings about the problem of inflation which is reflected as the general price of goods and services increase rapidly. To avoid this problem the monetarism theory suggests that regulation be made both by the government and the central banking based on the targeted economic growth.

Other economic theories such as the Keynesian and the new Keynesian theories help to deal with the problem of unemployment in the economy which may be as a result of economic depression (the bad economic times) (Isaac, 2011). The Keynesian economic theory solves this problem by encouraging more government spending and lower taxes in order to the economic aggregate demand and raise the economy from its depression. In this way more employment opportunities are created. The adjustment of price and wages in the economy is a bit low to some extent. This is addressed by the new Keynesian theory to explain unemployment such as the involuntary unemployment.

Some problems in the economy such as the demand and supply mismatch are well explained by the economic theories such as the classical and the new classical theories. If the supply in the economy changes, this will be eventually countered by a change in demand on the other side until an equilibrium point is achieved. Elementary economic theories are of great importance in examining the problems and economic behavior and should be implemented to foster economic growth of a country (Granger, King & White, 2015).

Unfavorable balance of payments

As the economy of a country grows controversy arises. This is reflected by the effects of growth of various sectors of the economy. The macroeconomic objectives to some extend conflict with each other in an attempt to foster economic growth.

Economic growth and inflation: as the economy grows, it conflicts with the level of inflation. As the economy grows rapidly, inflation tends to increase (Rodriguez & Rodrik, 2010). The aggregate demand increases at a faster rate than the aggregate supply. This is an indication that the general price of goods and services increase as the demand is more than the supply.  Also as the economy grows fast, businesses find it difficult to employ adequate skilled labor. As a result, wage inflation occurs which in turn raises the general price of goods and services.

Economic growth and the balance of payments: economic growth which is reflected by increment in the gross domestic product may be as a result of increased consumer expenditure. This is likely to cause unfavorable balance of payments. As consumer expenditure rises, the consumption of imports increases leading to unfavorable balance of payments as imports may definitely exceed the exports.

Economic growth and budget deficit: the government may wish to foster economic growth by reducing the budget deficit. In this way, the tax rates rise and the government expenditure is lowered. This in turn reduces the aggregate demand in the entire economy and as a result the economic growth declines (Cooper, 2011). Also the government may wish to improve the economic growth by expanding its fiscal policy. This means that the government will reduce taxes and increase its expenditure. This will raise the aggregate demand and improve the economic growth but it will increase the budget deficit.

Unemployment and inflation: as the economy grows, unemployment reduces. This is due to the fact that the growing economy creates more jobs both internally and externally. As more jobs are available, the demand for wage increment rises. This leads to wage inflation which in turn raises the general price of the available goods and services (Mullineaux, 2013).

The government economic policies refer to various courses of action which are actually by the government to control the entire economy (Elson & Cagatay, 2010). The government comes up with these policies in order control various economic activities which include the expenditure and taxation, control of money in the economy and the control of the labor market among others. The government economic policies can be divided into two namely the monetary and the fiscal policy. These two policies are mostly used by the government to control its economic operations and both aim at fostering economic growth.

The government uses the monetary policy to mainly control the supply of money in the economy and encourage economic growth. This is done through the central banking of every country (Easterly, 2015). The government controls the supply of money in the economy mainly by manipulating the interest rates. In order for the government to encourage economic growth, it lowers the prevailing interest rates in the economy. Through this more investors are attracted into the economy as money is readily available at low costs. The increased investments aid in fostering economic growth.

The volatility of exchange rates

As the government monetary policy fosters economic growth by availing money to investors at low costs, it has its repercussions too on the domestic economy. Too much supply of money in the economy increases inflation and the value of the currency may decrease. However this problem can be overcome by the government raising its interest rates to reduce the supply of money and ensure the domestic economy grows.

The government uses the fiscal policy to control the aggregate demand in the entire economy (Schuknecht, 2010). This policy enables the government to control its expenditure and taxation on the domestic businesses. In for the government to foster economic growth, it can increase its expenditure in the entire economy and lower the taxation levied on the domestic businesses and firms. This increases aggregate demand in the economy as the general price for goods and services decreases due to the lowered tax and as a result the economy continues to grow.

The government economic policies positively impact the domestic economy as both of them aim at improving the economic performance (Frieden, 2014). The government should implement the selected economic policies with great care to avoid the collapse of the economy. In case any problem arises as a result of the implemented government economic policy, the necessary action should be undertaken to protect a country’s economy in the best way possible.

Conclusion:

A country’s macro-economy is evaluated based on the performance of the entire economy as a whole. The macroeconomic sector deals with aggregate factors and is measured based on these factors. The four key elements of every country’s macro-economy include the gross domestic product, unemployment, inflation and the balance of payments. An economy is said to be positive if its gross domestic product increases with time, the unemployment rate decreases, inflation is kept less than two percent and the balance of payments is kept favorable (Gough, 2012). Most economies ranging from developing to developed countries are facing a lot of economic challenges mostly the increased unemployment rate and unfavorable balance of payments. For a country to experience positive economic growth, it has to consider the micro and macro-economic policies as well as the government policies (Milgrom & Roberts, 2012). The integration of these policies enables the formulation and implementation of relevant economic policies which improve the economy to a greater extent. Careful application of the formulated economic policies enables the growth of the domestic economies.

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