MACROECONOMIC PROBLEMS:

Undesirable situations that exist in the macroeconomy, largely because one or more of the macroeconomic goals are not satisfactorily attained. The primary problems are unemployment, inflation, and stagnant growth. Macroeconomic theories are designed to explain why these problems emerge and to recommend corrective policies. Macroeconomic problems arise when the macroeconomy does not satisfactorily achieve the goals of full employment, stability, and economic growth. Unemployment results when the goal of full employment is not achieved. Inflation exists when the economy falls short of the stability goal. These problems are caused by too little or too much demand for gross production. Unemployment results from too little demand and inflation emerges with too much demand. Stagnant growth means the economy is not adequately attaining the economic growth goal. Each of these situations is problematic because society is less well off than it would be by reaching the goals. Unemployment Unemployment arises when factors of production that are willing and able to produce goods and services are not actively engaged in production. Unemployment means the economy is not attaining the macroeconomic goal of full employment.

While attention is usually focused on the unemployment of labor, such as the time Pollyanna Pumpernickel was laid off from her job at the OmniMotors Car Company, any of the four factors of production can suffer unemployment. For example, The Wacky Willy Company might be operating one of its Stuffed Amigos factories at half capacity or Herb Haberstone might leave a section of his farmland uncultivated. Unemployment is a problem because:

Less output is produced and thus the economy is less able to address the scarcity problem. The owners of unemployed resources receive less income and thus have lower living standards.

Inflation Inflation arises when the average price level in the economy consistently and persistently increases. In other words, prices generally rise from month to month and year to year. With inflation the economy is not attaining the stability goal.

Inflation is an average increase in prices, with some prices rising more than the average, some rising less, and some even declining. As such, not every member of society is likely to experience exactly the same inflation. Inflation is a problem because:

The purchasing power of financial assets such as money declines, which reduces financial wealth and lowers living standards.

Greater uncertainty surrounds long-run planning, especially the purchase of durable goods and capital goods. Income and wealth can be haphazardly redistributed among sectors of the economy and among resource owners.

The Business Cycle Unemployment and inflation tend to vary with business-cycle instability. At some times, unemployment is less of a problem and inflation is more. At other times, unemployment is more of a problem and inflation is less. Consider how these two problems connect to the two primary phases of the business cycle.

Contraction: The contraction phase of a business cycle is characterized by a general decline in economic activity. Aggregate demand is less, meaning less output is produced, and thus fewer resources are employed. For this reason, unemployment tends to be a key problem. However, because markets are more likely to have surpluses than shortages, inflation tends to be less of a problem. Expansion: The expansion phase of a business cycle is characterized by a general rise in economic activity. Aggregate demand is higher, production is greater, and more resources are employed. Demand for production often outpaces the ability to supply the production. Under these circumstances, because markets are more likely to have shortages than surpluses, inflation tends to be the primary problem. However, with robust production and jobs aplenty, unemployment tends to be less of a problem.

Stagnant Growth The third problem of stagnant growth arises because the supply of aggregate production is not increasing at a desired pace or is even declining. An increase in the total production of goods and services is generally needed to keep pace with an increase in the population of society and expectations of a rising living standard. Stagnant growth exists if total production does not keep pace. This means the macroeconomic goal of economic growth is not attained.

Reasons for stagnant growth can be identified with a closer look at the quantity and quality of the resources used for production.

Quantity: The available quantities of the four factors of production--labor, capital, land, and entrepreneurship--can restrict the growth of production.

The quantity of labor is based on both the overall population and the portion of the population willing and able to work. Should either decline, then growth is not likely to keep pace with expectations. If, for example, Edgar Millbottom decides to quit his job and spend his time doing nothing but vegetating on his parents living room sofa, then the total quantity of labor declines. The quantity of capital depends on the amount of investment expenditures relative to the depreciation of the existing capital stock. If investment expenditures should decline or depreciation increase, then the economy is less likely to grow. If, for example, restrictive government regulations and high taxes discourage The Wacky Willy Company and

similar manufacturing companies from building new factories, then the total quantity of capital declines.

Quality: The quality of the four resources can also lead to stagnant growth. The two most noted resource quality influences are technology and education. The lack of technological progress, which could result from allocating fewer resources to scientific research can limit increases in the quantity of resources. Along a similar line of reasoning, allocating fewer resources to education can also limit resource quality

Write an explanatory note on the Macroeconomic

Targets

1 Introduction There are four major macroeconomic targets. They are Full Employment, Inflation Control, Balance of Payments Equilibrium and Economic Growth. This topic is very interesting as it can form the introduction to the macroeconomic part of the course and also a central part of the end of the course when it considers the objectives of Government.

Allthough the purpose of this exercise is to give an outline of the Macroeconomic Targets the role of government is also important since inevitably the direction of the economy will to a considerable degree be dependant on government policies. 2. Full Employment The dominant economic and social objective of government is to achieve full employment. It has been defined as a situation where work is available for all those willing and able to work at the going wage rate. To achieve this objective then the problem of unemployment must be tackled. There are five main causes of unemployment (1) Structural Unemployment Structural unemployment is where the structure of the economy changes. Employment in some industries may expand while in others is contracts. This can be caused by a change in the pattern of demand such as the demand for coal. A second reason could be a change in the methods of production. This is known as technological unemployment where new technology leads to redundancies. (2) Cyclical Unemployment Cyclical unemployment is also known as Demand Deficient Unemployment and is associated with economic recessions. As the economy moves into recession consumer demand falls and in due course production will be reduced leading to laying off of workers. As the economy picks up on its path through the Trade Cycle so production increases and demand for labour increases. Hence the reference to Cyclical Unemployment. (3) Undermeployment Underemployment occurs when an individual is working below full capacity. It is also known as Disguised Unemployment. It can arise in a situation where for example, a worker is employed for only part of a week but his addition to total production (MPP) is very low. Likewise a university graduate with a first class honours degree is delivering goods for the local supermarket to earn a living. (4)Frictional Unemployment Frictional unemployment is also regarded as Search Unemployment and occurs when there may be, say, 100 carpenters unemployed in New York while at the same time Universal Studios in Hollywood need 100 carpenters. At this point the carpenters are searching for work and Universal Studios are searching for workers. (5)Institutional Unemployment

This occurs where obstacles to the mobility of labour or the removal of the incentive to work such as in the following situations o o o A "Close Shop" exists creating a situation where non-union members are refused entry to the workplace There is a shortage of housing in areas where jobs are available. The gap between take home pay and social welfare is so narrow people decide it is better to opt out of the workforce

(6)Seasonal Unemployment Certain industries have greater demand for labour at different times of the year. The tourism industry is a good example. During the winter many people here will little opportunity to gain employment. 3. Inflation Control Keeping prices under control is a major concern in any economy. Some governments, such as the Thatcher governments of the 1980s, could be regarded as considering achievement of low levels of inflation as the prime macroeconomic target. There are two main forms of Inflation. They are Demand Pull and Cost Push. Demand Pull arises where aggregate demand is greater than aggregate supply while Cost Push is a consequence of increasing costs such as wages and taxes pushing prices up. There are a number of Deflationary Measures which can be adopted in order to counter inflation. 1.Cutting government expenditure reduces aggregate demand controls demand pull inflation 2. Increase direct taxation (income tax) to reduce aggregate demand 3. Reduce the money supply to control demand pull inflation through diminished aggregate demand 4. The government, together with the social partners, can establish control over excessive wage increases which lead to higher prices. The can encourage moderation by both workers in their wage demands and producers in their pricing policies. This can act as defence against cost push inflation 4. The Balance of Payments In an open economy where there is a high level of dependency on foreign trade the authorities must maintain vigilance over their foreign trade because of the consequences in other areas. One important point for observation is the annual Balance of Payments statistics. The balance of payments is a record of a countrys financial transactions with the rest of the world. In the current account it records the movements of exports and imports of both visible and invisible while the capital account movements of capital in and out of the country are recorded. If a deficit on current account is recorded it is evidence that there has been an excess of imports of goods and services over exports of goods and services. The prime consequence of this is that there will be fall in demand for the national currency. (This should now be read in the EMU context). If there is a decline in demand for the currency the value could fall if the ECB does not take action to maintain its value. This could lead to other consequences such as increases in interest rates to protect the outflow of capital which will follow. In summary, it is imperative that great vigilance should be maintained over our international trading position and every effort should be brought to bear to strengthen the system because of the consequences in other spheres. 5. Economic Growth Economic growth involves a change in Gross National Product with no change in the structure of society. The achievement of substantial levels of growth is an aspiration of most policy options. It would be useful to consider the positive and negative features of economic growth.

Below are some of the most prominent benefits (1) Increase in employment (2) The standard of living of the people will be improved (3) There will be an expansion and improvement in the infrastructure (4) Increased investment will be encouraged (5) Improved technology from the increased investment will stimulate production While there are some noteworthy benefits there are also some costs to be incurred in pursuing economic growth as listed below (1) The environment is threatened by factors such as building, chemicals and motorways. (2) There may be waste of resources which are very finite (3) There is a probability that the increased wealth will not be equitably distributed (4) With urban expansion not enough care may be taken to safeguard the community against urban problems such as intensive housing without green space and other facilties leading to crime and vandalism. 6. Conclusion The macroeconomic economy covers a broad canvas dealing with national and internationl issues. The four targets of full employement, inflation control, the balance of payments and economic growth need to be pursued and a degree of coordination maintained for the efficient management of the economy.