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Macroeconomic Principles Definition
The definition of macroeconomic principles entails a series of factors that make up macroeconomics itself. These factors include national output or economic growth, price stability, and unemployment. You will find that as you study macroeconomics, everything tends to be about these three factors. So, knowing this, how will we define macroeconomic principles? They are general rules surrounding the factors used in analyzing the performance and structure of economies on a large scale.
Macroeconomic principles are the general rules surrounding factors used in analyzing the performance and structure of economies on a large scale.
Now, let's define each of the three main factors we mentioned earlier. First, let's look at the national output or economic growth. The national output is the overall value of goods and services an economy produces within a given period. We measure this using the gross domestic product (GDP). One of the main reasons why we measure the national output is to measure economic growth. We do this using the real GDP, which is the total value of goods and services an economy produces within a given period using constant prices.
Real GDP is the total value of goods and services an economy produces within a given period using constant prices.
We mentioned "national output or economic growth" because economic growth is determined by comparing the real GDP for two different periods.
Economic growth is the change in real GDP between different periods.
Now, let's define price stability. This refers to the condition where prices increase at a rate that does not alter the decision-making of economic agents.
Price stability refers to the condition where prices increase at a rate that does not alter the decision-making of economic agents.
Economists refer to the change in prices as inflation. And inflation is measured using the consumer price index, which is the average change in prices paid by consumers over time.
Inflation refers to the change in the price level over time.
The consumer price index is the average change in prices paid over time by consumers for consumer goods and services.
Economists do not want prices to decrease. Rather, they want them to be stable by increasing at a moderate rate.
See the definition for price stability above.
Finally, let's define unemployment (or employment - it's a "glass half full or half empty" situation). Unemployment refers to the situation where people are willing and capable of working and are actively searching for work, but do not have work.
Unemployment refers to the situation where people are willing and capable of working and are actively searching for work but do not have work.
Unemployment is bad because it means the economy may not be using its human resources fully, which means it is not growing as well as it could. It is also bad because it means that people may be struggling to afford a decent living.
So, here are some macroeconomic principles you should keep in mind:
- There must be positive economic growth
- There must be price stability
- There must be low unemployment
These three principles are what we aim for as economists.
Importance of Macroeconomic Principles
You may be wondering what the importance of macroeconomic principles is. How and why do the macroeconomic principles matter? Well, the macroeconomics principles are important for two main reasons. The first reason is that they help us understand the effects the business cycle (short run) has on the economy. The second reason is that they help us understand how the economy grows in the long term (long run).
These two periods are illustrated in the macroeconomic model, which shows aggregate demand and aggregate supply. Now, let's illustrate the macroeconomic model using the aggregate demand curve and aggregate supply curve. Note that the model is plotted with the price level on the vertical axis and real GDP on the horizontal axis.
First, let's look at the aggregate demand curve. The aggregate demand curve shows the relationship between the total quantity of goods and services demanded at different price levels in the economy. Take a look at Figure 1 below.
The aggregate demand curve shows the relationship between the total quantity of goods and services demanded and different price levels in the economy.
Fig. 1 - Aggregate demand curve, StudySmarter Originals
As shown in Figure 1, the aggregate demand curve is downward sloping from left to right.
Now, let's look at the aggregate supply curve. The aggregate supply curve shows the relationship between the total quantity of goods and services supplied at different price levels in the economy. Take a look at Figure 2 below.
The aggregate supply curve shows the relationship between the total quantity of goods and services supplied and different price levels in the economy.
Fig. 2 - Short run aggregate supply curve, StudySmarter Originals
Note that the aggregate supply curve presented above is the short-run aggregate supply curve, and it slopes upward from left to right. In the long run, the aggregate supply curve is vertical, as shown in Figure 3 below.
Read our explanation on The Long-Run Aggregate Supply Curve to find out more!
Fig. 3 - The macroeconomic model, StudySmarter Originals
When fluctuations occur in the short run, the aggregate supply and aggregate demand curves may shift, as shown in Figure 4 below. The principles of macroeconomics help us understand what these shifts mean for the economy and whether these shifts are desirable or not.
Fig. 4 - Shifts in the aggregate supply and aggregate demand, StudySmarter Originals
As shown in Figure 4, both the price level and output increase as the aggregate demand curve shifts to the right. The price level and output will decrease if the aggregate demand curve shifts back to the left where it was initially.
However, if the aggregate supply shifts to the right, the output will increase, whilst the price level will decrease. The output decreases, and the price level increases when the aggregate supply curve shifts to the left. With knowledge of the macroeconomic principles, economists can determine whether these fluctuations are desirable or not.
Macroeconomic Principles Problems and Policies
Knowing the macroeconomic principles, economists can solve associated problems using policies. The main problems are poor economic growth or economic decline, inflation, and high unemployment. These are addressed using two main policies: fiscal policy and monetary policy.
Fiscal policy refers to the government's response to economic problems through government spending and taxation. On the other hand, monetary policy refers to the central bank's response to economic problems by managing the country's money and overall banking system.
Fiscal policy refers to the government's response to economic problems through government spending and taxation.
Monetary policy refers to the central bank's response to economic problems by managing the country's money and overall banking system.
In terms of fiscal policy, the government spends by either making purchases or making transfer payments. While purchases are payments made for goods and services such as roads and housing, transfer payments are payments made for welfare purposes, such as allowances for the elderly and the unemployed.
For monetary policy, the central bank manipulates the interest rate to address problems like inflation. For instance, an increase in the interest rate will reduce consumption and investment, which means that aggregate demand will shift to the left, reducing prices.
Macroeconomic Principles of Taxation
To understand the macroeconomic principles of taxation, let's first define taxation. Taxation refers to compulsory payments levied on individuals and businesses by the government.
Taxation refers to compulsory payments levied on individuals and businesses by the government.
Tax is usually a percentage of the income of an individual or a business. In terms of the main principles of taxation, the general rule is that it should be beneficial to the people. This means that the revenue from taxes should provide things the people need, such as healthcare, housing, and even employment!
There are certain taxation principles that are aimed for when designing the tax policy. Taxation must be fair, certain, convenient, and efficient.
- In terms of fairness, people must have the ability to pay the taxes levied. For example, taxes can be levied according to income to ensure that people do not struggle more than others to pay taxes.
- In terms of certainty, taxes should provide a consistent revenue stream for the government. Taxes therefore cannot be levied on items that would lead to fluctuating revenue.
- In terms of convenience, the tax-paying process itself should be simple enough for every citizen to comply with.
- For efficiency, the tax collection process should not warrant the excessive allocation of resources. In simple terms, money or other resources should not be wasted to collect taxes.
International Trade Principle of Macroeconomics
International trade is the part of macroeconomics that considers the trading of goods and services between countries. International trade is significant because it is a key part of the national output or income. International trade involves exports and imports. Exportation refers to the selling of goods and services to a foreign country by a home country. On the other hand, importation refers to the buying of goods and services from a foreign country by a home country.
International trade is the part of macroeconomics that considers the trading of goods and services between countries.
Exportation refers to the selling of goods and services to a foreign country by a home country.
Importation refers to the buying of goods and services from a foreign country by a home country.
Macroeconomic Principles for a Changing World
In summary, the principles of macroeconomics involve ensuring that there is continued economic growth through increasing national output or real GDP, reduced unemployment, and price stability. These are ensured using monetary policy and fiscal policy as tools to address the fluctuations that emerge in the short run.
Congrats! You have finally made it through the principles of macroeconomics. This explanation just scratches the surface. You should look at our articles on: Taxation, Inflation, Unemployment, and Economic Growth to complete your understanding of this topic.
Macroeconomic Principles - Key takeaways
- Macroeconomic principles are the general rules surrounding factors used in analyzing the performance and structure of economies on a large scale.
- Macroeconomic principles help us understand the effects the business cycle (short run) has on the economy.
- Macroeconomic principles help us understand how the economy grows in the long term (long run).
- Fiscal policy and monetary policy are used to address macroeconomic problems.
- International trade is the part of macroeconomics that considers the trading of goods and services between countries. It involves importation and exportation.
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Frequently Asked Questions about Macroeconomic Principles
What are the macroeconomics principles?
Macroeconomic principles are the general rules surrounding factors used in analyzing the performance and structure of economies on a large scale. The factors include economic growth, low unemployment, and price stability.
What is the importance of understanding the principles of macroeconomics in your daily life?
The principles of macroeconomics help us understand macroeconomic fluctuations in the short run and economic growth in the long run. They help economists respond to these fluctuations through the appropriate monetary or fiscal policies.
What are the four main factors of macroeconomics?
The four main factors of macroeconomics are: national economic output, employment, inflation, economic growth rate.
What are characteristics of macroeconomics?
The main characteristics of macroeconomics are that it is concerned with the aggregate parameters.
What are the tools of macroeconomics?
The tools economists use to solve macroeconomic issues include fiscal policy and monetary policy.
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