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Describe Major Macroeconomic Issues.

Ans:

Macroeconomic issues refer to those problems and issues that affect all sectors across

the economy. Among the major economic issues discussed and analyzed in

macroeconomics are problems of economics of economic growth and development,

issues relating to business cycles and economic stability, problems of inflation,

unemployment, poverty, etc. While the underdeveloped countries suffer from low

income, poverty and unemployment, the developed countries have the problems of

economic instability caused by recurrent business cycles. Here, we briefly outline some

of these major macroeconomic issues.

1. Economic Growth

The world today presents a picture of appalling contrasts. Nearly two-thirds of world’s

population has a claim on just about one fifth of global income. Consequently, this vast

chunk of world population lives in poverty and deprivation in countries that are called

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underdeveloped or developing nations. Thus, the problem of these poor countries is

to provide more income and better living to their people through economic growth and

development. This calls for macroeconomic policies to mobilize resources, both physical

and financial and channelizing those resources into improve productivity, enlarge

incomes, generate employment and thus improve countries, too, have to adopt policies

that maintain the tempo of growth that they have already achieved and thus prevent any

deviations and shortfalls from the long-run growth process.

2. Business Cycles

Whereas the problem with the underdeveloped countries is to increase tempo of

economic growth, the advanced countries have the problem of maintaining the high

growth rate already achieved and preventing economic instability or fluctuations in

economic activity caused by the business cycles. Business cycles refer to a series of ups

and downs in economic activity such as production, income, employment, etc. In the

advanced capitalist countries there are periods of boom or prosperity when production,

output, income and employment start declining. Recession culminates into depression

which is a phase of widespread unemployment, low production, low income and overall

contraction of economic activity. The job of macroeconomic policy is to minimize such

fluctuations and bring about economic stability or stable growth. Macroeconomics as a

branch of economics was in fact born out of this necessity to formulate policies that

could remove such economic fluctuations. Much of the study of macroeconomics is

associated with the name of J.M.Keynes who suggested ways and means to lift the

U.S. economy out of the depths of the Great Depression of 1930s.

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3. Inflation and Deflation

Inflation means rising prices and deflation is just the opposite of it. Rising prices or

inflation reduce purchasing power of the fixed income groups and cause them much

suffering. But slow and mild rise in prices also means increasing profitability or producers

that induces them to expand output and employment. Falling prices (deflation) act as

disincentive to production due to decrease in profitability. Thus, while some degree of

inflation may be good for production, rapidly rising prices may cause of purchasing

power and consequent low demand that is bound to have an adverse affect on

production, income and employment. Thus, the macroeconomic policy has to ensure

reasonable price stability that helps in maintaining steady profit expectations and higher

production levels. As observed by Lipsey and Chrystal.

Swings in economic activity have usually accompanied swings in inflation. Generally,

attempts by governments to control high inflation have tended to bring about

recessions… An important policy problem for the governments is how to stimulate

economic activity without causing inflation.1

4. Unemployment

Unemployment is usually widespread in the underdeveloped countries due to such

factors as lack of adequate employment avenues in the underdeveloped industrial sector

low productive and primitive agriculture and painfully slow growth of the service sector.

The macroeconomic policy in this context would aim at rapid economic development with

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special emphasis on creating larger employment opportunities. Unemployment is also

found in the advanced or developed economic activity is known as cyclical

unemployment. The method to tackle this type of unemployment is to increase in

government’s expenditure as well as reduction in taxes with a view to increase demand,

generating greater profit expectation among the producers and inducing them to

produce larger output with increased employment of labour.

5. Budgetary Deficits and Fiscal Policy

Macroeconomic policy to remove cyclical unemployment, as suggested above, aims at

increasing government spending and at the same time reducing taxes. This policy

regarding government spends more than what it earns by way of taxes, this excess of

expenditure over revenue is called budget deficit. This gap between spending and

earning (budget deficit) is largely met through public borrowings, i.e., government

raising loans from the market. The budget deficit was regarded as good because it

created more jobs but the deficit being continuously financed by borrowings raises the

burden of debt. The burden of debt refers to annual payment of instalments of debt as

well as the interest on debt, which is met through tax payers money. Thus, as the debt

burden increases more taxes are imposed as well as the rates of existing taxes are

raised. This places additional burden increases more taxes are imposed as well as the

rates of existing taxes are raised. This places additional burden on the taxpayers. And

unchecked government borrowings may ultimately lead to a ‘debt-trap’ where new loans

have to be raised to pay back the interest and instalments of old loans. Such a situation

needs to be carefully avoided through suitable macroeconomic policies.

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6. Interest Rates and Monetary Policy

Monetary policy refers to the policy of the monetary authority (such as the Reserve Bank

of India) aims at regulating supply of money and interest rates with a view to influence

savings, investment and through them affecting levels of production, employment and

prices in an economy. Tight monetary policy and high rates to interest in expanding their

business. This reduces overall level of spending (since the investment component of

expenditure becomes low) and reduces demand that can curb inflationary pressures. On

the other hand, reduction in interest rates can make investment more profitable by

reducing the cost of borrowings. This can set in expansionary forces at work, i.e., more

investment, larger spending, more demand and the consequent greater output and

possibly lower prices.

7. Conclusion

The macroeconomic issues discussed above can be broadly categorized into two types,

viz., (i) those that really matter for their own sake such as economic growth and better

living standards, economic stability and eradication of business cycles, control of inflation

and price stability, unemployment removal, etc. These are such outcomes that the

nation aims at and therefore they are known as ‘Targets’ of policy. And then (ii) there

are issues like fiscal policies, i.e., government’s expenditure, taxes, budgetary deficits,

public borrowings, etc., and monetary policies, i.e., money supply, rate of interest, etc.

These issues or policies are not needed for their own sake. They are in fact the ‘Policy

Instruments’ that are used to achieve the targets or issues comprising the first category.

These instruments are in fact the variables that the government can change to achieve

the targets. Thus, as observed by Lipsey and Chrystal,

The macroeconomic policy problem is to choose appropriate values of the policy

instruments in order to achieve the best possible combination of outcomes of the

targets.1

Now the question arises, which of these two approaches, micro and macro, would be

best suited for a scientific understanding of the economic situation. It appears that these

two are competitive approaches and we have to select either one of them to analyze a

problem. In fact, they are not so competitive, they are interdependent, and neither

approach is complete without the other. Macroeconomic theory has its foundation in

microeconomic theory and likewise microeconomic theory has its foundation in

macroeconomic theory. Thus, strictly speaking there is only one ‘economics’, and the

micro and macro approaches are both complementary and mutually helpful to analyze

the problems of an economy. To illustrate this point, we take the overall objective of

economic policy which is to maximize economic welfare of the people in a country.

Macroeconomics tells us that the economy will be close to welfare maximization if it

makes the full utilization of its total resources. But actual welfare does not depend only

makes the full utilization of its total resources. But actual welfare does not depend only

on the fuller of resources, it also depends upon how resources are allocated among

different lines of production. If we ignore resource allocation pattern, the welfare may

not be maximized as misallocation of resources (deviation from optimum allocation of

resources) would mean economy may be producing more of those goods which are not

needed much while the goods needed most may be less produced inspite of overall fuller

utilization of resources. Thus, macro approach has to be supplemented by the

microeconomic theory which deals with the resource allocation among different uses and

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lays down rules for the optimum allocation for welfare maximization, the welfare target

cannot be achieved unless resources are being fully utilized at the macro level. Thus, the

basic goal of economics. This goal can be obtained only when we have fuller utilization of

resources as laid down by macroeconomic analysis. Thus, to understand the functioning

of an economy and for effective implementation of economic policies, we must integrate

these two approaches in a judicious manner.

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