Macroeconomics (from the Greek prefix macro - meaning "big" and economy) is a branch of economics that deals with performance, structure, behavior, and overall economic decision making. This includes regional, national, and global economies.
Macroeconomists studied aggregate indicators such as GDP, unemployment rates, national income, price indices, and the interrelationships between different economic sectors to better understand how the overall function of the economy is.
Macroeconomists develop models that explain the relationship between factors such as national income, output, consumption, unemployment, inflation, saving, investment, international trade and international finance.
While macroeconomics is a vast field of study, there are two areas of research that are symbolic of the discipline: attempts to understand the causes and consequences of short-run fluctuations in national income (business cycles), and efforts to understand the determinants of long-term economic growth (increase in national income ). Macroeconomic models and their estimates are used by governments to assist in the development and evaluation of economic policies.
Macroeconomics and microeconomics, a pair of terms coined by Ragnar Frisch, are the two most common areas in economics. Unlike macroeconomics, microeconomics is a branch of economics that studies individual and corporate behavior in making decisions and interactions between individuals and firms in a narrowly defined market.
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Basic macroeconomic concepts
Macroeconomics covers a wide range of concepts and variables, but there are three main topics for macroeconomic research. Macroeconomic theory usually connects the phenomenon of output, unemployment, and inflation. Beyond macroeconomic theory, these topics are also important for all economic agents including workers, consumers, and producers.
Output and revenue
The national output is the sum total of all that a country produces in a given period of time. Everything that is produced and sold produces the same amount of income. Therefore, output and income are usually considered equivalent and two terms are often used interchangeably. Output can be measured as total revenue, or can be seen from the production side and measured as the total value of final goods and services or the sum of all added value in the economy.
Macroeconomic output is usually measured by gross domestic product (GDP) or one of the other national accounts. Economists interested in long-term growth in output are studying economic growth. Technological advances, accumulation of machinery and other capital, as well as better education and human resources are the factors that lead to an increase in economic output over time. However, output does not always increase consistently over time. The business cycle can cause a short-term decline in output called a recession. Economists are looking for macroeconomic policies that prevent the economy from slipping into recession and that lead to faster, longer-term growth.
Unemployment
The number of unemployed in the economy is measured by the unemployment rate, ie the percentage of unemployed workers in the labor force. The unemployment rate in the workforce only includes workers who are actively seeking employment. People who retire, pursue education, or are discouraged from finding work because of the lack of job prospects are excluded.
Unemployment can be generally broken down into several types associated with different causes.
- The classic unemployment theory shows that unemployment occurs when wages are too high for employers to be willing to hire more workers. Another more modern economic theory suggests that increased wages actually reduce unemployment by creating more consumer demand. According to these newer theories, the unemployment result of reduced demand for goods and services generated through labor and indicates that only in markets where profit margins are so low, and where markets will not bear the rising prices of products or services, the higher produces unemployment.
- Consistent with the classical unemployment theory, frictional unemployment occurs when there is an appropriate job vacancy for a worker, but the length of time it takes to find and find work leads to a period of unemployment.
- Structural unemployment includes various possible causes of unemployment including discrepancies between workers' skills and the skills required for open employment. A large amount of structural unemployment can occur when the economy is transitioning the industry and workers find their skills previously no longer needed. Structural unemployment is similar to frictional unemployment because both reflect the problem of matching workers with job vacancies, but structural unemployment also includes the time it takes to acquire new skills in addition to the short-term search process.
- Although some types of unemployment may occur regardless of economic conditions, unemployment cycles occur when growth stalls. Okun's law is an empirical relationship between unemployment and economic growth. The original version of Okun's law states that a 3% increase in output will lead to a 1% reduction in unemployment.
Inflation and deflation
The general price increase across the economy is called inflation. When prices fall, there is deflation. Economists measure this price change with the price index. Inflation can occur when the economy gets too hot and grows too fast. Similarly, a declining economy can lead to deflation.
The central banker, who manages the state money supply, seeks to avoid price changes by using monetary policy. Increasing interest rates or reducing the money supply in the economy will reduce inflation. Inflation can lead to increased uncertainty and other negative consequences. Deflation can lower economic output. The central bankers try to stabilize prices to protect the economy from the negative consequences of price changes.
Price level changes may be caused by several factors. The quantity theory of money states that changes in the price level are directly related to changes in the money supply. Most economists believe that this relationship explains long-term changes in the price level. Short-run fluctuations may also be related to monetary factors, but changes in aggregate demand and aggregate supply can also affect price levels. For example, a fall in demand due to a recession can lead to lower price levels and deflation. A negative supply shock, such as the oil crisis, lowers the aggregate supply and may cause inflation.
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Macroeconomic model
Aggregate aggregate supply request
The AD-AS model has become the standard textbook model for explaining macroeconomics. This model shows the real level of price and level of output given equilibrium in aggregate demand and aggregate supply. The downward slope of the aggregate demand curve means that more output is demanded at a lower price level. The downward slope is the result of three effects: Pigou or the effect of real equilibrium, which states that when real prices fall, real wealth increases, resulting in higher consumer demand for goods; Keynes or interest rate effect, which states that when prices fall, demand for money decreases, causes the interest rate to decline and loans for investment and consumption increase; and the net export effect, which states that as prices rise, domestic goods become relatively more expensive for foreign consumers, leading to a decline in exports.
In conventional Keynesian use of the AS-AD model, the horizontal aggregate supply curve is at low output levels and becomes inelastic near the potential output point, which corresponds to full employment. Since the economy can not generate beyond the potential output, any AD expansion will lead to a higher price level than the higher output.
The AD-AS diagram can model various macroeconomic phenomena, including inflation. The change of factor or the determinant of the non-price level causes a change in aggregate demand and an overall aggregate demand curve (AD) shift. When demand for goods exceeds supply there is an inflation gap in which demand-pull inflation occurs and the AD curve shifts upward to higher price levels. As the economy faces higher costs, cost push inflation occurs and the US curve shifts upward to higher price levels. The US-AD diagram is also widely used as a pedagogical tool to model the impacts of various macroeconomic policies.
IS-LM
The IS-LM model represents all combinations of interest rates and outputs that ensure balance in goods and money markets. The goods market is represented by a balance in investment and savings (IS), and the money market is represented by a balance between money supply and liquidity preference. The IS curve consists of points where the investment, given the interest rate, equals the savings, the given output.
The IS curve slopes downward as output and interest rates have an inverse relationship in the goods market: as output increases, more money is saved, which means the interest rate should be lower to encourage sufficient investment to match the savings. The LM curve tilts upward as interest rates and output have a positive relationship in the money market: as output increases, demand for money increases, resulting in an increase in interest rates.
The IS/LM model is often used to indicate the effects of monetary and fiscal policy. Textbooks often use the IS/LM model, but do not show the complexity of most modern macroeconomic models. However, these models still have relationships similar to those in IS/LM.
Growth model
Robert Solow's neoclassical growth model has become a common textbook model for explaining long-term economic growth. This model begins with a production function in which the national output is the product of two inputs: capital and labor. The Solow model assumes that labor and capital are used at a constant rate without unemployment fluctuations and the usual capital usage seen in the business cycle.
Increased output, or economic growth, can only occur due to increased capital stocks, larger populations, or technological advances leading to higher productivity. An increase in the saving rate leads to a temporary increase as the economy creates more capital, which adds to output. However, ultimately the depreciation rate will limit capital expansion: savings will be used to replace depreciated capital, and no savings will continue to finance additional capital expansion. The Solow model shows that economic growth in terms of per capita output depends only on technological advances that increase productivity.
In the 1980s and 1990s endogenous growth theory emerged to challenge the theory of neoclassical growth. This model group explains economic growth through other factors, such as increased yields for capital scale and learning while doing, which is determined endogenously rather than the improvement of exogenous technologies used to explain growth in the Solow model.
Macroeconomic policy
Macroeconomic policies are usually implemented through two tools: fiscal and monetary policy. Both forms of policy are used to stabilize the economy, which can mean pushing the economy to a level of GDP consistent with full employment. Macroeconomic policies focus on limiting the effects of the business cycle to achieve economic goals of price stability, full employment, and growth.
Monetary policy
The central bank implements monetary policy by controlling the money supply through several mechanisms. Typically, the central bank takes action by spending money to buy bonds (or other assets), which increase the money supply and lower interest rates, or, in the case of contractive monetary policy, the bank sells bonds and takes money out of circulation. Usually the policy is not implemented by directly targeting the money supply.
The central bank continues to shift the money supply to keep interest rates fixed targeted. Some of them allow interest rates to fluctuate and focus on targeting the inflation rate instead. Central banks generally try to achieve high output without allowing a loose monetary policy that creates a large amount of inflation.
Conventional monetary policies can be ineffective in situations such as liquidity traps. When interest rates and inflation close to zero, the central bank can not loosen monetary policy through conventional means.
Central banks can use unconventional monetary policies such as quantitative easing to help increase output. Instead of buying government bonds, the central bank can apply quantitative easing by buying not only government bonds, but also other assets such as corporate bonds, stocks and other securities. This allows lower interest rates for broader asset classes beyond government bonds. In another example of unconventional monetary policy, the US Federal Reserve has recently made an effort on the policy with Operation Twist. Unable to lower the current interest rate, the Federal Reserve cuts long-term interest rates by buying long-term bonds and selling short-term bonds to create a flat yield curve.
Fiscal Policy
Fiscal policy is the use of government income and expenditure as an instrument to influence the economy. Examples of such tools are expenditure, taxes, debt.
For example, if the economy produces less than the potential output, government spending can be used to use idle resources and increase output. Government spending does not have to cover the entire output gap. There are multiple effects that increase the impact of government spending. For example, when the government pays for a bridge, the project not only adds a bridge's value to the output but also allows bridge workers to increase their consumption and investment, which helps to close the output gap.
The effects of fiscal policy can be limited by crowding out. When the government takes a shopping project, it limits the amount of resources available for use by the private sector. Crowding out occurs when government spending only replaces private sector output rather than adding additional output to the economy. Crowding out also occurs when government spending raises interest rates, which limits investment. Defenders of the fiscal stimulus argue that crowding out is not a problem when the economy is depressed, lots of resources are left blank, and interest rates are low.
Fiscal policy can be implemented through automatic stabilizers. Automatic stabilizers do not experience the slowness of discretionary fiscal policy. Automatic stabilizers use conventional fiscal mechanisms but apply as soon as the economy has decreased: expenses for automatic unemployment benefits increase as unemployment rises and, in a progressive income tax system, the effective tax rate automatically falls when income declines.
Comparison
Economists usually prefer monetary policy rather than fiscal because it has two major advantages. First, monetary policy is generally applied by independent central banks rather than political institutions that control fiscal policy. Independent central banks tend not to make decisions based on political motives. Second, monetary policy suffers from shorter slowness and lags outside than fiscal policy. Central banks can quickly create and implement decisions while discretionary fiscal policy may take time to pass and even longer to be implemented.
Development
Origins
Makroekonomi diturunkan dari bidang yang pernah dibagi dalam teori siklus bisnis dan teori moneter. Teori kuantitas uang sangat berpengaruh sebelum Perang Dunia II. Butuh banyak bentuk, termasuk versi berdasarkan karya Irving Fisher:
In the general view of quantity theory, the money velocity (V) and quantity of goods produced (Q) will be constant, so that any increase in money supply (M) will lead to a direct increase in the price level (P). The quantity theory of money is a central part of the classical economic theory prevailing in the early 20th century.
Austrian School
The work of Ludwig Von Mises Theory of Money and Credit , published in 1912, is one of the first books of the Austrian School to deal with macroeconomic topics.
Keynes and his followers
Macroeconomics, at least in its modern form, begins with the publication of John Maynard Keynes's General Theories on Employment, Interest, and Money. When the Great Depression struck, classical economists had difficulty explaining how goods could sell and workers could be left unemployed. In classical theory, prices and wages will go down until the market is cleared, and all goods and labor are sold. Keynes offers a new economic theory that explains why markets may be unclear, which will evolve (later in the 20th century) into a group of schools of macroeconomic thinking known as Keynesian economics - also called Keynesianism or Keynesian theory.
In Keynes's theory, quantity theory is damaged because people and businesses tend to stick to their money in tough economic times - a phenomenon he describes in terms of liquidity preferences. Keynes also explains how multiplier effects will magnify a slight decrease in consumption or investment and cause a downturn across the entire economy. Keynes also notes the uncertainty of roles and animal spirits can play in the economy.
The following generation of Keynes combines the macroeconomics of General Theory with microconomic neoclassics to create neoclassical synthesis. By the 1950s, most economists had accepted the view of macroeconomic synthesis. Economists such as Paul Samuelson, Franco Modigliani, James Tobin, and Robert Solow developed formal Keynesian models and contributed formal theories of consumption, investment, and money demand that perfected the Keynesian framework.
Monetarism
Milton Friedman updated the quantity theory of money to include the role of money demand. He argues that the role of money in the economy is sufficient to explain the Great Depression, and that aggregate-oriented explanations are not necessary. Friedman also argues that monetary policy is more effective than fiscal policy; However, Friedman doubts the government's ability to "perfect" the economy with monetary policy. He generally likes a stable money supply policy rather than frequent intervention.
Friedman also challenged the relationship between Phillips's curve between inflation and unemployment. Friedman and Edmund Phelps (who are not monetary experts) propose an "additional" version of the Phillips curve that excludes the possibility of a stable, long-term tradeoff between inflation and unemployment. When the 1970s oil shocks created high unemployment and high inflation, Friedman and Phelps were justified. Monetarism was very influential in the early 1980s. Monetarism falls from favor when central banks find it difficult to target money supply, not interest rates as suggested by monetary experts. Monetarism also became unpopular when central banks created a recession to slow inflation.
New classic
The new classical macro economy is more challenging to Keynesian schools. A central development in new classical thinking came when Robert Lucas introduced rational expectations of macroeconomics. Before Lucas, economists generally use adaptive expectations in which agents are assumed to see the past to make hope about the future. Below rational expectations, agents are assumed to be more sophisticated. A consumer will not only assume a 2% inflation rate simply because it's been an average of the past few years; he will look at monetary policy and current economic conditions to make the forecast information. When new classical economists introduce rational expectations into their models, they show that monetary policy can have only limited impact.
Lucas also made an influential critique of Keynesian empirical models. He argues that forecasting models based on empirical relationships will continue to produce the same predictions even when the underlying model produces the changed data. He advocates a model based on fundamental economic theory which, in principle, is structurally accurate as the economy changes. Following Lucas's critique, the new classical economists, led by Edward C. Prescott and Finn E. Kydland, created the real business cycle (RBC) of macroeconomic models.
The RBC model was created by combining the fundamental equations of neo-classical microeconomics. To generate macroeconomic fluctuations, the RBC model explains recession and unemployment with technological change, not a change in the market for goods or money. Critics of the RBC model argue that money clearly plays an important role in the economy, and the notion that a technological slump could explain the recent recession is absurd. However, technological shocks are only the most prominent of a myriad of possible shocks to a modelable system. Although there are questions about the theory behind the RBC model, they are clearly influential in the economic methodology.
New Keynesian Response
Keynesian economists have just responded to the new classic school by adopting rational expectations and focusing on the development of micro established models that are resistant to Lucas's criticism. Stanley Fischer and John B. Taylor produced early work in this field by showing that monetary policy can be effective even in models with rational expectations when contracts are locked in wages for workers. Other new Keynesian economists, including Olivier Blanchard, Julio Rotemberg, Greg Mankiw, David Romer, and Michael Woodford, expanded this work and demonstrated another case where inflexible pricing and wages caused monetary and fiscal policy to have a real effect.
Like the classical model, the new classic model assumes that the price will be perfectly adjustable and monetary policy will only lead to price changes. New Keynesian models investigate rigid price and wage sources because of imperfect competition, which will not adjust, allowing monetary policy to affect quantity, not price.
By the late 1990s economists had reached a rough consensus. The nominal rigidity of new Keynesian theory combined with rational expectations and RBC methodology to produce a dynamic stochastic balance model (DSGE). The incorporation of elements from different schools of thought has been dubbed the new neoclassical synthesis. These models are now used by many central banks and are a core part of contemporary macroeconomics.
Source of the article : Wikipedia
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