24. Macroeconomics

Each microeconomic unit functions within the context of an entire economy and is closely affected by the performance of that economy.

The distinction between macro – (from the Greek word ‘makros’ meaning ‘large) and microeconomics is a some­what arbitrary one but it serves to emphasize the differing preoc­cupations and approaches of the two branches. In microeconomics we approach the problem of allocating scarce resources with a theory of price determination based upon the interaction of supply and demand. In macroeconomics we employ the theory of the circular flow of income in order to analyze the overall behaviour of the economy.

The circular flow of income pictures an economy as a closed system with income flowing between the two basic spending units – households and firms. Households pay money to firms in return for goods and services produced by the firms, and firms close the circuit by paying money to households in return for the use of factors of production – land, labour and capital – owned by the households. This is obviously a gross over­simplification of what actually occurs.

In macroeconomics we are concerned with aggregate levels of output, income, employment and prices, and with their fluctuations. We shall consider how these aggregates are influenced by foreign trade, and how they are influenced by the way the resources of an economy are distributed between consump­tion and investment. We shall also have to consider the role of government in determining the flow of income because govern­ments command a large proportion of total expenditure and invest­ment in modern economies. And the inclusion of govern­ment in our model illustrates another distinction between micro- and macroeconomics. In microeconomics the emphasis is on the working or market forces mediated by the government. On the other hand, macroeconomics is predominantly policy-oriented. It is about government intervention.

State intervention is now an accepted fact in broad areas of economic life. It is a relatively recent phenomenon, which owes its development to the inter-war depression (1921-39). During that period of indust­rial slump, when the UK unemployment rate averaged 14%, con­siderable doubts arose about the ability of an unregulated economy to achieve full employment.

The 1960s saw the development of what has become known as monetarism, associated primarily with Professor Milton Friedman at the University of Chicago. Monetarism has its roots in the economic theory attacked by Keynes and suggests that altering the level of demand in the economy affects only the rate of inflation and not output and employment. Monetarism became increasingly influential in economic policy during the 1970s and 1980s.

Governments now intervene in all economic sectors – in agriculture, in industry, in the labour market, in trade. They control monopolies in order to ensure free competition; they are responsible for defence and law and order; they supply the economic infrastructure of transport systems, energy, posts and telecommunications; and they provide a wide range of social services and facilities. The dissatisfaction with the role of government at the macroeconomic level was matched in many countries in the 1980s with a greater emphasis on the operation of markets free of unnecessary govern­ment intervention.

Governments have four basic economic objectives: full employ­ment, price stability, balance-of-payments equilibrium, and econ­omic growth. These objectives are just as applicable to governments of developing countries as to those of developed countries, though the latter have minuscule problems to solve in comparison to the problems facing developing countries.

Comprehension:

1. What is the difference between macroeconomics and microeconomics?

2. Where is the emphasis in microeconomics?

3. Why is state intervention an accepted fact now?

4. When did monetarism come into being?

5. In what economic sectors do governments now intervene?

6. How many basic economic objectives do governments pursue?

7. Are these objectives applicable only in developed countries?