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Issues And Concepts Of Macro Economics

 Issues and Concepts

The chief issues of Macro Economics are:

  1. Employment and Redundancy
  2. Ascertainment of National Income
  3. General Price Level and Boom

The main concepts framed by Government to overcome the issues are:

  1. Fiscal Strategy
  2. Monetary Strategy
  3. Growth Strategy

Issues of Macro Economics

  1. Employment and Redundancy

    The prime issue in macro economics is to describe what finds the level of employment and redundancy. Classical economists refused the fact that there could be non-voluntary redundancy of labour and other resources for a long phase.

    The economists thought that with variations in remuneration and rates, redundancy would be mechanically eradicated and full employment accomplished. However this did not appear to be so at the stage of recession in the thirties and there after. Keynes described the level of employment and national income is ascertained by aggregate demand and aggregate supply.

    With aggregate supply curve the balance unvaried in the short phase it is the insufficiency of aggregate demand that grounds underemployment symmetry with the manifestation of non-voluntary redundancy.

    As per him, it is the variations in private investment that causes changes in aggregate demand and is hence accountable for the difficulties of cyclical redundancy.

  1. Ascertainment of National Income

    National Income is the worth of all the completed commodities and services manufactured in a nation in any year. Level of national income or what is termed Gross National Commodity GNC depicts the performance of the economy in a year and ascertains the overall living standards of the people of the nation.

    The larger the per capita national income, the higher the volume of commodities and services accessible for consumption per individual on a standard. Provided the technology utilised for manufacturing, the scale of employment moves hand in hand with the variation in dimension of national income.
                The variations in fiscal performance chiefly apparent themselves in variations in national income and employment. When all resources in an economy are being employed for manufacturing, the dimension of national income engendered is termed as potential GNP or full employment level of income. In a free market economy, the variations in aggregate demand case deviation of national earnings from the level of potential GNP in short term.

  1. General Price Level and Boom

    Another major issue is to describe the difficulty of boom. Boom has been prime issue countenanced by both the developed and developing nations in the last six decades. Classical economists thought that it was the volume of money in the economy that ascertained the general price level in the economy and as per them; rate of boom is based on the growth of money supply in the fiscal system.

    Keynes however criticised the volume theory of money supply did not always tend to boom or hike in rates. Prior to Second World War, described that non-voluntary redundancy and recession were due to the insufficiency of aggregate demand, during the war period when price mount very high he described in a booklet ‘how to pay for war’.

Concepts to overcome the issues

  1. Fiscal Strategy

    A significant way the government affects the fiscal system is through the adoption of appropriate fiscal strategy. The fiscal strategy denotes to taxation and outlay decisions of the government.

    Prior Keynes it was supposed that the government budget must if at all possible be equated that is revenue collected by the way of taxes should be equal to the outlay made by the government.

    Keynes presented that the balanced budget is not good under all circumstances. He advocated that at all times of recession; deficit budget must be made to get the economy out of it and to eradicate non-voluntary redundancy.

    In case of insufficiency budget the government outlay surpasses revenue collected through taxes. The budget insufficiency mounts when the government enhances its outlay without raising taxes or it mounts when taxes are decreased without cutting back on outlay.

    Hence the strategy of insufficiency budget denotes expansionary fiscal strategy. The budget insufficiency mounts aggregate demand and tends to increase in national income and employment.

  1. Monetary Strategy

    Monetary strategy is yet another chief instrument which the statute uses to accomplish the aims of price management, full employment and economic development.

    Monetary strategy is a vital equipment of controlling inflation in the economy. It is usually assumed that large expansion in money supply grounds hike in price level. To scrutinise inflation tight monetary strategy is followed wherein rate of interest is raised and availability of credit is decreased.

    When interest rate rises, businessmen and households ascertain it more expensive to borrow. This disheartens demand for credit and tends to the contraction of money supply in the economy. Apart, to discourage the creation of surplus credit by the banks for investment and consumption purposes, cash reserve ratio is hiked or Government bonds and securities are sold to the banks and the general public.

  1. Growth Strategy

    Money economists distrust the efficiency of fiscal and monetary policies to eradicate the variations in the financial activity through demand management i.e. overpowering the level of aggregate demand.

    A school of financial thought known as supply side economics argue that focus of government strategy must move from demand management to kindle aggregate supply of productivity.

    Apart, for promotion of growth especially in developing nations, the government follows correct fiscal and monetary policies. It is usually believed that greater economic development in the developing nations will tend to the reduction in a poverty and redundancy.

    To mount the rate of saving and investment the government must take suitable fiscal and monetary methods. Of late, it has been observed that strategy of moderate taxes generates more revenue through greater tax compliance and simultaneously it gives incentives to save and invest more.

    In developing nations in order to trigger financial development the government must enhance its outlay on infrastructure such as irrigation projects, roads and highways, power, telecommunication, ports etc. Apart from it, it has been laid stress by Amartya Sen, for picking up the pace of development and eradication of poverty the government must invest more in social sector comprising of education, health, literacy.

    It is significant to message that a developing nation cannot rely on private sector investment alone which is governed and guided by profit aim. Hence to supplement the private sector investment the government itself must directly commence investment to encourage and pick up the pace of financial development.

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