A NOTE ON MACROECONOMICS

A NOTE ON MACROECONOMICS
1.1 Macroeconomics Issues and Ideas
Macroeconomics is concerned with the structure, performance and behaviour
of the economy as a whole. The prime concern of macroeconomists is to
analyse and attempt to understand the underlying determinants of the main
aggregate trends in the economy with respect to the total output of goods and
services (GDP), unemployment, inflation and international transactions. In
particular, macroeconomic analysis seeks to explain the cause and impact of
short-run fluctuations in GDP (the business cycle), and the major determinants
of the long-run path of GDP (economic growth). Obviously the subject
matter of macroeconomics is of crucial importance because in one way or
another macroeconomic events have an important influence on the lives and
welfare of all of us. It is difficult to overstate just how important satisfactory
macroeconomic performance is for the well-being of the citizens of any
country. An economy that has successful macroeconomic management should
experience low unemployment and inflation, and steady and sustained economic
growth. In contrast, in a country where there is macroeconomic
mismanagement, we will observe an adverse impact on the living standards
and employment opportunities of the citizens of that country. In extreme
circumstances the consequences of macroeconomic instability have been devastating.
For example, the catastrophic political and economic consequences
of failing to maintain macroeconomic stability among the major industrial
nations during the period 1918–33 ignited a chain of events that contributed
to the outbreak of the Second World War, with disastrous consequences for
both humanity and the world economy.
Because macroeconomic performance and policies are closely connected,
the major macroeconomic issues are also the subject of constant media attention
and inevitably play a central role in political debate.
The influence of the
Modern macroeconomics
economic performance of the economy on political events is particularly
important and pertinent in liberal democracies during election campaigns.
Research has confirmed that in the post-war period the outcome of elections
has in many cases been affected by the performance of the economy as
measured by three main macroeconomic indicators – inflation, unemployment
and economic growth. While there are obviously many non-economic
factors that influence the ‘happiness’ of voters, it is certainly the case that
economic variables such as employment and income growth are an important
explanatory factor in voting behaviour. Furthermore, ideological conflict often
revolves around important macroeconomic issues (see, for example, Frey
and Schneider, 1988; Alesina and Roubini with Cohen, 1997; Drazen, 2000a).

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