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Why understand macroeconomics

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Macroeconomics is a branch of economics. Before we define macroeconomics we better start with economic itself.

Economics is the study of how scarce resources are or should be allocated. Each resource is used to make a decision on what to use it for at a particular time the resource or factor is produced.

Economic has several branches. Microeconomics examines how production and consumption of goods are organised and this is usually at an individual or organisational level. Microeconomics is the study of aggregates (whole amount or totality) of economic relations. It focuses not on the output of one firm or farm, but of all firms and farms, the rate of interest affecting, the whole economy, the rate of inflation which means the general and continuing rise of prices, the growth rate of one business but of the economy in which case we talk of the gross domestic product (GDP); employment and unemployment rates, the value of the currency as well as major components of aggregate demand and income. All these constitute macroeconomics.

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Economics is further divided into positive economics which is concerned with what actually happens or what would happen under various conditions. Normative economics consider what would be the best methods of economic organisation from the point of view of both equity and efficiency. Economic policy makers use both positive and normative economics. Hence, in dealing with macroeconomics both approaches positive and normative will be used.

Almost all political leaders of modern states want their economies to grow rapidly at full employment with low stable inflation and rising stock prices. Elections are won or lost in view of what happens to such economic aggregates as employment or unemployment, investment taking place in the economy as a whole, whether prices are rising or falling. Hence, understanding macroeconomic is essential to know why at any time there are problems like inflation, unemployment, currency appreciations or depreciations which affect everyone whether as producer or purchaser and consumer of goods and services.

At election time, most politicians promise the public or electorate what they will do for them but they seldom fulfill all the promises because though economics is a social science it lacks the exactitude of natural sciences like chemistry and physics. Forecasting future events is hazardous exercise. Rarely are forecasts accurate because of exogenous factors. Those who are in office now in Malawi must have promised several things without foreseeing the torrentious rains that have caused harm to human and animal life, as well as a devastated agriculture, such natural disasters and terrorist events upset budgetary planning by both government and firms.

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In trying to solve macroeconomic problem often government give rise to another. The principal macroeconomic goals of any society to provide everyone who wants to keep the rate of inflation low and stable while generating rapid growth rates in production and the standards of living.

When exogenous forces on the economy a government may adopt the following policies:

(i) Monetary policy: This consists of the decision made by the central bank to charge the cost and availability of money and credit. The cost of money is interest. The central bank may reduce the interest rate to make it easier for businesses to borrow capital and expand production. This would create employment, but there is the rise of inflation as well

(ii) Fiscal policy: This involves changes in taxes and expenditures by the government through the ministry of finance. Fiscal policy has got great influence on the growth of the economy by affecting labour, capital and technology. When taxes are moderate companies are encouraged to invest their capital those who work remain enthusiastic since not all their earnings are taken away from them. The money the government raises through taxation can be used to subsidize food production, research and development and so on.

(iii) Trade policy: When a government sees that unemployment is growing because local companies are failing to compete with imports it may raise tariffs (custom duty) and reduce quotas so as to minimise foreign competition. But in so doing consumers may be deprived of cheaper foreign goods and be compelled to buy local ones at higher prices which may be of poorer quality. Besides a country’s exports may face retaliation in foreign market.

(iv) Regulatory policy: A government issues decrees to make laws regarding the quality of products to be manufactured for use at home and in markets abroad. A government may make rules regarding water and air pollution safety standards. All these regulations contribute to a company cost of production and its losses.

A knowledge of macroeconomics makes people in office and citizenry know in advance results of adopting a particular policy, for example it may be a good thing to raise minimum wages for those who are already working, but this may discourage employers from hiring those who are unemployed and substitute machiness for human labour. To combat inflation a central bank may raise interest rates but this may contribute to unemployment by making credit scares and expensive.

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