The subject matter of macro economics are as follows:
1. Determination of National Income:
The first major issue in macro economics is to explain what determines the level of employment and national income in an economy and therefore what causes involuntary unemployment. The level of national income and employment are very low in times of depression as in 1930s in various capitalist countries of the world. This will explain the cause of huge unemployment that emerged in these countries. Classical economists denied that there could be involuntary unemployment of labour and other resources for a long time. Classical economist thought that with changes in wages and prices, unemployment would be automatically removed and full employment established. But this did not appear to be so at the time of great depression in the thirties (1930) and after. Keynes explained the level of employment and national income is determined by aggregate demand and aggregate supply. With aggregate supply curve remaining unchanged in the short run, it is the deficiency of aggregate demand that causes under employment equilibrium with the appearance of involuntary unemployment. According to Keynes it is the changes in private investment that causes fluctuations in aggregate demand and is, therefore, responsible for the problems of cyclical unemployment.
2. General Price-level and Inflation:
Another macro economic issue is to explain the problem of inflation. Inflation had been a major problem faced by both the developed and developing countries in the last 50 years. Classical economists thought that it was quantity of money in the economy that determined the general price level in the economy and according to them, rate of inflation depended on the growth of money supply in the economy. Keynes criticized the ‘quantity theory of money’ and showed that the expansion in money supply did not always lead to inflation or rise in price-level. Keynes who before the second world war explained that involuntary unemployment and depression were due to the deficiency of aggregate demand, during the war period when prices rose very high, he explained in his booklet’ how to pay for war’ that just as unemployment and depression were caused by the deficiency of aggregate demand, inflation was due to the excessive aggregate demand. Thus, Keynes put forward what is now called ‘demand-pull theory of inflation’. After Keynes, theory of inflation has further developed and many theories of inflation depending upon various causes have been put forward, to analyze the problem of inflation is an important issue in macroeconomics.
3. Business Cycles:
Throughout history market economics have experiences business cycles. Business cycles refer to fluctuations in output and employment with alternating periods of boom and recession. During boom or prosperity both output and employment are at high levels, whereas in recession both output and employment fall as a consequence large unemployment came into existence in the economy. When recession is extremely severe, they are called depression. What are the causes of these business cycles is an important macro economic issue which has been highly controversial. The objective of macro economic policy is to achieve economic stability with equilibrium at full- employment, level of output and income.
4. Stagflation:
During the decade of 1970s and in the subsequent decades market economies have experienced a still more intricate problem which has been described as stagflation. While in business cycles, recession or depression is accompanied by not only high degree of unemployment but also rapid inflation. This is a period which has high unemployment and recession (stagflation) which co-exists with high inflation. This problem is called stagflation. Stagflation could not be explained with Keynesian theory, which focuses on the demand side. Therefore, a new economic thought which is called supply-side economies emerged which explained stagflation by laying stress on the supply side of economic activity. Stagflation is an important issue of modern macro economics.
5. Economic Growth:
Another important issue in macro economics is to explain what determines economic growth in a country. Theory of economic growth has been recently developed as an important branch of macro economics. The problem of growth is a long-run problem and Keynes did not deal with it. It was Harrod and Domar who extended the Keynesian analysis to the long-run problem of growth with stability. They laid stress on the dual role of investment- one of income generating, which Keynes ignored because of his preoccupation with the short-run. Harrod and Domar in their models showed that investment adds to productive capacity (capital stock), and then if growth with stability (without stagnation or inflation) is to be achieved, income or demand must be increasing at a rate large enough to ensure the full utilization of the increasing capacity. Thus, macro economic models of Harrod and Domar have explained the rate if growth of income that must take place if the steady growth of the economy is to be achieved. These days growth economics has been further developed and extended a good deal and new theories of growth have been put forward by Solow, Meade, Kaldor and Joan Robinson.
Since the growth theories of Harrod, Domar, Kaldor, Meade and others apply particularly to the present day developed countries, special theories which explain the causes of underdevelopment and poverty in less developed countries and they also suggest strategies for initiating and accelerating growth in them have also been propounded. These special growth theories relating to less-developed countries are generally known as economies of development.
6. Balance of Payments and Exchange Rate:
Balance of payments is the record of economic transactions of the residents of a country with the rest of the world during a period. The objective of preparing such a record is to present an account of all the receipts of goods imported, services rendered, and capital received by the residents of a country and the payments made for goods imported, services received and capital transferred to other countries by residents of a country. There may be deficit or surplus in balance of payments. Both create problems for an economy. An important effect is that the transactions in balance of payments are influenced by the exchange rate. The exchange rate is the rate at which a country’s currency is exchanged for foreign currencies. The instability in exchange rate has been a major problem in recent years which has given rise to serious balance of payments problems.
Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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