Macroeconomics Assignment Sample
Macroeconomics Assignment Sample
A. Introduction
Macroeconomics is basically a branch of economics that centres around the study of economics as a whole. It is responsible for examining aggregate phenomena such as total output, employment, inflation, and national income to understand and analyse the behaviour and performance of an entire economy. This study revolves around explaining three major macroeconomic theories along with their key principles. In addition to this, it also highlights the relationship between economic factors and organisation growth. Finally, it illustrates the tools used by government and central banks regarding monetary and fiscal policies at the time of economic crisis.
B. Main Body
“Three macroeconomic theories and their key principles”
“Neo-classical economic theory”
Definition: This theory basically emphasises “supply and demand” to be the driving force behind the pricing, production and consumption of goods and services. Neo-classical economics emerged around 1900 in order to compete with the previous theories of classical economics (Abdulwahab et al. 2020). It represents a revival and modification of classical principles with a greater emphasis on mathematical modelling and a more systematic approach to understanding economic behaviour.
Explanation: “Neo-classical economic theory” argues that market forces like demand and price are the major controlling factors of customers. It also holds the view that the economy has a natural tendency to correct itself, and interventions to fine-tune it using monetary and fiscal policies can exacerbate issues (Wallstreetmojo.com, 2023). This theory also emphasises the significance of equilibrium within the market where supply is equivalent to demand and leads to optimal allocation of resources.
Key principles
- Individuals are inclined towards maximising utility by acting rationally.
- Firms strive to maximise their profitability.
- Through the interplay of supply and demand equilibrium can be achieved in the market.
- Purchase decisions are driven solely by utility and satisfaction considerations.
“Keynesian economic theory”
Definition: “Keynesian economic theory” states that supply is driven by demand and a healthy economy is more inclined to invest or spend rather than save. This theory was developed during the 20th century by British economist “John Maynard Keynes” (Rowthorn, 2020). Expansionary fiscal policy is supported by this theory. It utilises unemployment benefits, spending on education by the government and infrastructure
Explanation: Keynesian economics is grounded in two central concepts. Firstly, it asserts that in the short run, factors influencing total demand are more likely to trigger economic events such as recessions compared to factors affecting overall supply (Baqaee and Farhi, 2022). Secondly, the theory contends that wages and prices have a tendency to be inflexible, meaning that during economic downturns, unemployment can arise due to difficulties in adjusting these elements.
Key principles
- Supply is driven by demand and spending more than saving is a sign of a sound economy.
- In order to create jobs, the government must enhance spending.
- According to this theory, if the demand is inadequate then it can create unemployment.
- Response to prices and wages is slow in the context of supply and demand.
“Marxian economic theory”
Definition: Marxian economic theory was developed in the 19th century by the famous philosopher and economist Karl Marx. This theory emphasises the role of labour in terms of developing an economy (Øversveen, 2022). It is a critical analysis of the capitalist system that emphasises the exploitation of labour and the inevitability of social conflict.
Explanation: This theory is based on the belief that the price of a commodity can be reliant on its use-value. In this matter, value is associated with the worth of the commodity compared to the worth of other commodities. Marx argued that capitalism’s pursuit of profit creates social inequality and alienation (Burkitt, 2019). The theory predicts the eventual collapse of capitalism and the emergence of a classless, socialist society.
Key principles
- This theory posits that social and economic institutions are shaped by economic structures.
- In a capitalist economy, economic relations can be defined by the struggle between social classes (Carched, 2023).
- The value of a commodity is determined by the socially necessary labour time required for its production.
- Profit is derived from the exploitation of surplus labour value produced by the working class (Screpanti, 2019).
“Relationship between Economic Conditions and Organisational Performance”
The relationship between economic conditions and organisational performance is intricate, with various macroeconomic indicators influencing business operations and decision-making. Three key economic indicators “Gross Domestic Product (GDP) growth,” “inflation,” and “interest rates” play a pivotal role in shaping the business environment.
GDP growth reflects the economic condition which is considered a pivotal determinant of organisational performance. GDP is responsible for measuring the monetary value of final services and goods (Imf.org, 2023). The high growth rate in GDP often corresponds to an increase in the spending of consumers, business investment and economic activity. In such periods, businesses may experience rising demand for their products and services, leading to higher revenues and potentially increased profitability. Conversely, during periods of low or negative GDP growth, businesses may face reduced demand, impacting sales and profitability.
Inflation is the rate at which the level of price of certain goods and services rises. It can affect businesses in multiple ways. In the UK it has been revealed that 60% of businesses have experienced a decline in their product demands due to the uplifting inflation rate. Businesses have faced increased costs for raw materials and labour, reducing profit margins. Additionally, inflation erodes the purchasing power of consumers, potentially leading to reduced consumer spending (Lieb and Schuffels, 2022). In order to combat this situation, businesses need to adopt their pricing strategies along with managing costs effectively and consider the expectations of inflation in long-term planning.
Changes in interest rates have a significant impact on the cost of borrowing and the attractiveness of investments. It has been observed that at times of low-interest rates, businesses find borrowing more affordable for expansion. It leads to the enhancement of investment. Conversely, higher interest rates can raise the cost of capital, potentially limiting investment and impacting profitability (Vartiainen et al.2020). Additionally, interest rates influence consumer spending; higher rates may lead to reduced borrowing for big-ticket items like homes and cars, affecting industries such as real estate and automotive.
Based on the expectations of Interest rates and GDP growth businesses can adjust their overall expenditure plans. Firms might enhance investment in potential projects and technologies at the time of economic expansion. Alternatively, at the time of contraction, businesses may scale back to conserve resources. Apart from this, Fluctuations in inflation and interest rates can affect financing costs and the value of assets. Organisations need to carefully manage their finances, considering the impact of interest rate changes on debt servicing and the potential effects of inflation on cash flow (Chen et al.2021). In addition to this, GDP growth and inflation can be closely monitored by businesses. These factors are responsible for influencing the purchasing power of the consumers. Understanding these economic conditions helps companies anticipate changes in market demand and adjust production levels accordingly.
“Compare and contrast the fiscal and monetary policy tools used by governments and central banks in response to economic crises”
Fiscal policy is associated with government actions regarding spending and taxation. During an economic crisis, the government can implement expansionary fiscal policies in order to stimulate economic activity. This may involve cutting taxes to boost consumer spending and increasing government spending on infrastructure, welfare programs, or other projects (Blanchard, 2023). Changes in fiscal policy often require legislative approval and it can lead to more extended implementation of timeline. Government spending and taxation are two basic tools that are used by governments and central banks as a response to economic crises. In this situation, the amount of spending on public services and projects is enhanced and Cuts in taxes to boost disposable income and encourage spending.
Monetary policies engage the control of interest rates and money supply by central banks. During economic crises, central banks may implement accommodative monetary policies, such as lowering interest rates or engaging in quantitative easing to encourage borrowing and spending (Bernanke, 2020). Central banks can make adjustments more quickly against monetary policies. Central banks have the authority to set interest rates and engage in open market operations, allowing for a relatively swift response to changing economic conditions. Interest rates and quantitative easing are two imporatnt tools that are used by governments and central banks regarding this situation.
C. conclusion
As a conclusive view, it can be stated that different theories of macroeconomics are based on different key principles and they focus on different aspects contributing to the economy. Factors like GDP growth rate, inflation and interest rate play a vital role in terms of shaping the performance of an organisation. These factors affect the demand of consumers significantly. the dynamic interplay of fiscal and monetary policies in response to economic crises reflects the nuanced approaches governments and central banks employ. A balanced and coordinated use of these tools is essential, recognizing their distinct roles and potential synergies for navigating the complexities of economic challenges and fostering stability and growth.
References
Abdulwahab, A.B.U.H., OMEDE, J.A. and JACOB, J.N., (2020). Postulations and Implications of Neo-Classical Theory on Nigeria’s Economic Development. Socialscientia: Journal of Social Sciences and Humanities, 5(3).
Baqaee, D. and Farhi, E., (2022). Supply and demand in disaggregated Keynesian economies with an application to the Covid-19 crisis. American Economic Review, 112(5), pp.1397-1436.
Bernanke, B.S., (2020). The new tools of monetary policy. American Economic Review, 110(4), pp.943-983.
Blanchard, O., (2023). Fiscal policy under low interest rates. MIT press.
Burkitt, I., (2019). Alienation and emotion: social relations and estrangement in contemporary capitalism. Emotions and Society, 1(1), pp.51-66.
Carchedi, G., (2023). On the economic identification of social classes. Taylor & Francis.
Chen, Y., Kumara, E.K. and Sivakumar, V., (2021). Investigation of finance industry on risk awareness model and digital economic growth. Annals of Operations Research, pp.1-22.
imf.org, (2023), GDP growth rate impact on business Available at: https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/gross-domestic-product-GDP [Accessed 17th November, 2023]
Lieb, L. and Schuffels, J., (2022). Inflation expectations and consumer spending: the role of household balance sheets. Empirical Economics, 63(5), pp.2479-2512.
Øversveen, E., (2022). Capitalism and alienation: Towards a Marxist theory of alienation for the 21st century. European Journal of Social Theory, 25(3), pp.440-457.
Rowthorn, R., (2020). The Godley–Tobin lecture*: Keynesian economics–back from the dead?. Review of Keynesian Economics, 8(1), pp.1-20.
Screpanti, E., (2019). Labour and value: Rethinking Marx’s theory of exploitation (p. 144). Open Book Publishers.
Vartiainen, E., Masson, G., Breyer, C., Moser, D. and Román Medina, E., (2020). Impact of weighted average cost of capital, capital expenditure, and other parameters on future utility‐scale PV levelised cost of electricity. Progress in photovoltaics: research and applications, 28(6), pp.439-453.
wallstreetmojo.com, (2023), about Keynesian theory Available at: https://www.wallstreetmojo.com/keynesian-economics/ [Accessed 17th November, 2023]
wallstreetmojo.com, (2023), about Marxian theory Available at: https://www.wallstreetmojo.com/marxism/ [Accessed 17th November, 2023]
wallstreetmojo.com, (2023), about neo classical theory Available at: https://www.wallstreetmojo.com/neoclassical-economics-theory/ [Accessed 17th November, 2023]
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