Tuesday, August 25, 2009

Macro Economics Problems

Macro economics deals mainly with the problems of employment or unemployment, rising prices or inflation and economic growth etc. We highlight these problems.

1. PROBLEM OF UNEMPLOYMENT: The classical economists believed in full employment i.e. all the resources of economy are fully employed in accordance with their capabilities. The labour force in the economy is fully employed hence there is no possibility of unemployment in the country. The classical economists presented as well as proved their theory of full employment with the help of goods market, labour market, money market and credit market. According to them market forces operate in such a way that full employment is restored automatically. But such utopia of full employment could not exist for ever. J. M Keynes rejected this philosophy of full employment in 1936 by wiring book “General Theory”. According to him equilibrium of level of national income may beat full employment, at above full employment and at below full employment. Thus according to Keynes capitalist economy may even experience unemployment. To remove unemployment Keynes suggested for state intervention. He stressed upon printing of new money and enhancing the job opportunities by introducing Public Works Programmers. This means that unemployment according to Keynes can be removed with the help of deficit budgets on the part of government.

Unemployment is not the issue just concerned with the poor countries it has also hit the developed countries except some rich countries. The macro economists are trying very hard to put unemployment to an end. Now the question rises, how unemployment is defined, nowadays, how it can be removed etc. In very simple words, “Unemployment represents that ratio of labour force which fails to get employment.” The surveys which have been conducted regarding unemployment in US defined an unemployed person as “An unemployed person is one who is not working and (1) he has made a lot of efforts to get employment during the last four weeks (2) after the removal from job he is excepting to be called back for job (3) or he is hoping to get the job during coming four weeks. It is told that any person wishes to work and fails to get job, such employment on the contrary if a person deliberately does not want to work such unemployment. The economists do not care for such employment. The real issue is to remove that unemployment which is involuntary. The Keynes thinks such employment due to market imperfections. As if wages are rigid down ward and wages are increased more than increase in prices due to the pressure of trade unions, the producers increase their profits or the supply of certain raw materials decreased at world level-all such may leap to increase the costs, of production. It will decrease aggregate supply. Hence the unemployment may rise. According to A. W Phillips the fall in unemployment is possible only at the expense of rise in prices. While Milton fried man and his followers think that there always exists a natural rate of unemployment in the economy, and the fiscal and monetary policies can not alter the level of such unemployment. The Keynesian and New classical economists are also of this opinion that in long run the level of unemployment can not be decreased from its natural level. Despite differences in thinking and observations the economists have the consensus that problem of unemployment must be removed.

2. PROBLEM OF INFLATION: During 1930’s the phenomenon of unemployment got a lot attraction. Hence most of policy experts presented their ideas to remove unemployment. As a government intervention was legitimized against the traditional Laisseze-fair of the classical economists. The government expenditure went on increasing to enhance employment, to provide social security, and to provide better social and economic services etc. The state intervention encouraged the growth of public sector and pubic spendings. In this situation the normal budgets of the governments were inadequate. So the governments had to restore the deficit financing. This state of affairs led to enhance aggregate demand in the economy. The increased demand for goods and services due to population growth also encouraged aggregate demand. The ruthless craze to get economic superiority and remove unemployment the industrialization was also considered something necessary. In this way, the investment expenditure also increased. Thus during 1950 to 1970, the greater increases in public spendings, private spendings and investment spendings greatly pushed the aggregate demand in the economy. With this the phenomenon of Demand Pull Inflation was observed. In this first half of 1970’s consequent upon certain supply. Shocks like oil crisis etc. the aggregate supplies declined-unable to match the rising demand. In this way costs of production and prices increased along with reduced production and employment. As a result a situation of inflation coupled with unemployment was observed in the world-which was given the name of “Cost-push Inflation”. During 1970’s and even till the present lime phenomenon of rising inflation and rising unemployment is commonly observed throughout the world. Meanwhile in the economic literature a bitter reality was identified known as “Phillips curve” - a curve which shows a trade-off between inflation and unemployment. It means that if any economy wants to reduce the level of unemployment, it will have to accept the rise n price level. Thus we find that most macroeconomists at present deal with the problems of unemployment and inflation. To remove these problems or attain economic stabilization “Fiscal and Monetary Policies” are advocated.

3. PROBLEM OF GROWTH: In the late 50’s and in the early 60’s the problem of growth got a lot off attraction. It means that poor and developing countries of the world wish to attain rise in their real national and per capita world incomes. Again the development countries of the world who have attained greater rise in their national and per capita incomes wish to maintain and change in technology. It means that this economists that what should be the level of rise in investment that mature economies could maintain their attained levels of income and employment without inflation and deflation. Such a state of affairs will result in the faller utilization of change in labour force, change in capital accumulation and change in level of income.

Now a days macro economics deals with the problem of growth- a situation for above the full employment. It is reminded that full employment and growth are not synonyms. Full employment means the maximization of output and employment in the presence of existing resources while economic growth is attached with potential increase in output and employment in the presence of increase in capital, increase in labour force, increase in natural resources and technological change. Full employment corresponds to the existing production frontier of economy while economic growth has the effect of shifting the production frontier of economy outward.

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