Introduction
Microeconomics can be defined as a subdivision of economics that deals with the routine, structure, and behavior of a national or regional economy. It puts more emphasis on the overall output of a nation and how the nation allocates its limited resources, i.e., land, labor, and capital, so as to maximize production and uphold trade and economic growth of that nation for future generations (Case & Fair 46-89). Additionally, macroeconomics tries to predict the economic conditions of a country/nation so as to assist consumers, firms, and governments make informed decisions. For instance, consumers may want to know the best time to find work, prices of goods and services in the market, and the cost of borrowing money; businesses will make a decision on the best time to expand production, and the government will use macroeconomics when budgeting, spending, creating taxes, deciding on interest rates and making policy decisions (Gordon & Solow 219-230).
Macroeconomic pointers such as Gross Domestic Product (GDP), unemployment rates, and price indices are employed to appreciate how the economy of a nation works. Moreover, relationships between national income, production output, consumption, unemployment, inflation, savings, and international trade and finance dynamics are pointed out by macroeconomics functions. However, macroeconomics is a broad field and cannot be studied as a whole. Therefore, it is divided into two areas; one that tries to explain the causes and consequences of short-run variation in the national income (business cycle), and the other tries to explain the determinants of long-run economic growth, i.e., national income growth (Case & Fair 110-119).
Fundamentals of Macroeconomics
Macroeconomics has three major fundamentals, which include: National output (measured by the gross domestic product), unemployment, and inflation.
National output/ Gross Domestic Product
Gross Domestic Product (GDP), as a basis of macroeconomics, refers to the full amount of goods and services that a nation creates. Moreover, the GDP being the fundamental gauge of the economy’s fiscal routine, it can be defined as the market value of all the goods and services produced in a country within the country’s financial year (Case & Fair 120-145). GDP is equal to all expenses of all goods and services produced in a country, equal to the total of value-added during the production of the goods and services by all industries within a country plus taxes and minus subsidies on the products, and finally, GDP is equal to a total of all the income created by the production of the goods and services in a particular country within a specific span of time.
Gross Domestic Product has three components which include: Consumption in the market and includes personal expenditure of the citizens of that particular country in their households (food, rent, medical, clothing) excluding the cost incurred when relocating to a new house; Investment which refers to the acquisition of new assets by businesses and household. For instance, the purchase of new machinery, software, and pieces of equipment. In investment expenses incurred by the household on new houses is included. However, buying of financial products like bonds and share is not considered as an investment but as savings; Government Spending which is referred to as the amount of money the government spends on final goods and services. These expenses include all the payments to the public servants, purchase of military weapons and all ventures by the government; Export of goods and services produced by the country and include all goods and services produced by the particular country for another country’s consumption; Imports which include all goods and services that a country import from another country for use in their country. However, all imports to a country are subtracted (Gordon & Solow 250- 273). Therefore, Gross Domestic Product to the sum of consumption, investment, government expenditure, and export minus imports
That is; GDP= Consumption + investment +Government expenditure + (Export –imports).
Unemployment
Unemployment as a fundamental of macroeconomics refers to a situation where people lose their jobs unwillingly while there are other workers in the country looking for work. Unemployment in a country means that the country does not fully utilize its resources, leading to some people who are willing to work jobless. Unemployed people exclude all those people who are not looking for a job or are unwilling to work (Case & Fair 300-390).
Unemployment is divided into four categories, namely: frictional unemployment, which occurs due to the time required to match the employment seeker requirements with the job opening on hand. This kind of unemployment is voluntary as the jobseeker fights back and forth between the available job choices and thus ends up being unemployed. Structured unemployment occurs when a large number of job seekers do not qualify for a large amount of labor force required, for instance, when a group of job seekers does not have the skills required by the employer. Structured unemployment is caused by a shift in consumer preference, technological changes, tax, and geographical location, among others; Seasonal unemployment occurs when demand and supply of goods and services fluctuate, thus affecting the amount of labor required. For instance, during summer, the demand for harvesting workers increases, and cyclical unemployment is caused by the business cycle where during low production, a firm lays off some workers only to reemploy them when production rises (Gordon & Solow 305 -307).
Unemployment is measured as a percentage of the total labor force available in a particular country. Unemployment /labor force *100 Where labor force refers to both unemployed people and the employed people of that particular country
According to Fair and Case (420-440), unemployment in a country affects the Gross Domestic product in that it affects the consumption of a household. This is so because, with less income, a household will reduce its consumption. Moreover, unemployment lowers the total yield of a country in terms of goods and services as the unemployed are not engaged in production.
Inflation
Inflation as an essential of macroeconomics refers to a state where there is a continued increase in the general price level leading to a reduction in purchasing power and monetary value. The rate of inflation is measured by the yearly percentage variation in the level of prices against the consumer index, which measures the cost of living of a typical household. Inflation is caused by increased domestic inflation where the government may increase the VAT leading to high prices of commodities and thus domestic inflation, fluctuation in the exchange rate where a currency of a certain country fluctuates over the other currencies (Gordon & Solow 308-313). This makes the imports expensive, and the export become lowly priced. Moreover, the sudden rise of prices in crude oil and other imports may lead to inflation in a country. Inflation causes increased prices of commodities of a country, making it unaffordable to the citizens, and this affects the gross domestic product of that country.
Conclusion
Microeconomics which tends to look at the output of an individual and firms within an economy is a scientific strategy that emphasizes all parts that constitute a country’s economy. Both micro and macroeconomics are conjoined, and thus their understanding would help countries and firms make informed decisions (Case & Fair 110-105). The fundamentals of macroeconomics help in evaluating the national output; the gross domestic product measure the total value of country goods and services, thus the income of the country within a financial year. On the other hand, unemployment measure the rate of dependence of the citizens of a country, i.e., the dependence of the unemployed on the employed citizens. Inflation as a fundamental of macroeconomics helps to gauge whether there is a lot of money circulation in a nation or a country as this affects borrowing and the prices of a country’s commodities in the international market. When a country is allocating resources to the various sectors of the economy in a country, they must take into consideration the command economy (forces within a competitive market, i.e., invisible hand that influence the allocation of resources) and the market economy.
Bibliography
- Case K. & Fair R.: Principles of Macroeconomics. Pearson Prentice Hall 2006, pg. 46 – 105, 110-390, 410-500
- Gordon J. & Solow R.: Productivity Growth, Inflation, and Unemployment. Cambridge University Press. 2004, pg. 219-273, 305- 313
- Keizō Nagatani. Macroeconomic dynamics. Cambridge University Press, 1981, pg. 150-200
- Fischer, Stanley. Macroeconomics. McGraw-Hill, 1990, pg. 750- 800
- Baumol, William & Blinder, Alan. Macroeconomics: principles and policy. 7th Edition. Dryden Press, 1997, pg. 350-400