The production, distribution, and consumption of goods and services in a given nation can be explained by economics which is a social science dealing with the study of how businesses, individuals, countries or governments choose to allocate resources for the satisfaction of their needs and wants. Economics tries to find out how to maximize output by determining the best organization and coordination of the various groups. The economic analysis can be classified into two groups macroeconomics, and microeconomics. The macroeconomics is focused on the overall economy and gives a review of the behavior of the aggregate economy that includes unemployment, national income, inflation, interest rate, price levels and growth rate. On the other hand, microeconomics concentrates on individual consumers in an economy.
The difference between Macroeconomics and Macroeconomics
Macroeconomics Analysis
This branch of economics deals with the analysis of the general economy in a broad perspective with a central focus on the following aggregates: Gross domestic product, national income, employment and unemployment level, budget deficit, level of inflation, the balance of payment and economic recession. Macroeconomics carries out an analysis of the relationship that exists between different sectors of the economy, and this helps to understand how the economy functions. Economists use macroeconomic models to analyze relationships between various economic factors like output, national income, investment, savings, finance, inflation consumption and international trades. These macroeconomic models are also used in constructing and evaluating the economic policy by the government entities like the reserve bank.
Uses of Macroeconomics
Through the macroeconomic analysis, it is possible to determine employment and income as well as comprehending the forces behind the aggregate employment and output in the market. This analysis is essential in determining the general prices of commodities in the market and the factors influencing these price levels. The study of macroeconomic models is necessary since the formulation of policies that will ensure that the economy is stable and able to sustain economic growth, in the long run, relies on them (Kates 34). Through the study of these models, economists can determine how to keep off recession hence achieving and maintaining sustainable economic growth.
Macroeconomics is responsible for the analysis of the features of the international trade as well as explaining the relationship between the exchange rate and balance of payment, and it helps in coming up with a solution to the problems of a balance of payment a country might be facing. States are facing challenges caused by unemployment and inflation and solving these problems economists are using the concepts of macroeconomics to determine the cause of this high unemployment and propose possible remedies. The fiscal and monetary policies are the center of focus in macroeconomic analysis, and they are vital since they significantly affect the economic performance.
Limitation of Macroeconomics
The analysis of Macroeconomics is not concerned with the internal composition of the aggregates and instead assumes that all aggregate variables are homogeneous which is not true. Similarly, it does not treat all variables equally since it considers some variables less critical. Macroeconomics focuses more on the general economy of the nation while ignoring the welfare of the individual consumers (Kates 34). The assumption that a thriving national economy reflects individual's well being is not correct because at times rise in national income could be due to only the rich becoming super rich while the majority of the general population remains poor.
Microeconomics analysis
Macroeconomics deals with the study of human behaviors and actions in the economy as well as how they need to distribute and utilize the scarce resources. Similarly, it is concerned with how to determine the relative prices and the forces in the market influencing these prices. The theories of product and factor pricing are used to explain the allocation of resources to the production of goods. Primarily, the microeconomic analysis focuses on two elements, the distribution of resources and economic efficiency and tries to solve the challenge of scarcity and resource allocation with the aim of establishing economic efficiency.
Uses of microeconomics
Microeconomics analysis aims at understanding the roles and behaviors of economic agents such as entrepreneurs, landlords, and labor. This analysis helps in understanding the functioning and behavior of individuals and business firms. For the economy to operate smoothly there is a need for policy instrument to guide it in its management. This analysis of microeconomics helps policymakers to develop the necessary policies like tax, price and exchange rate policies. Since microeconomics focuses on the individual customers, it allows citizens to understand the effect of the government policies.
Limitation of microeconomics
Although microeconomics has so many benefits, it also comes along with some flaws that hinder achieving some of the economic goals. The analysis of Microeconomics believes in the achievement of full employment that is not realistic as well as uses laissez-faire that is no longer practical in the modern world. Similarly, microeconomics only focuses on the part of the economy and not the general market of the country.
Methodology
This study employed both qualitative and quantitative research techniques in the analysis of the study subject to achieve a reliable result that could be generalized. To answer the question under investigation both secondary and primary data were collected from the previous researches and government websites respectively. The data was then analyzed using Microsoft Excel after being coded.
Findings and Results
The objectives of the government economic policies
Economic growth that is high and sustainable and the low inflation rate
The gross domestic product of a country determines the level of its economic growth and for an economy to be considered thriving the growth rate of its GDP need to be around 4% per year otherwise less than 1% means it is stagnant. The government will always try to avoid a stagnant economy because it leads to high unemployment low, productivity and an increase in the level of poverty (Engel 94). In cases where the economy suffers from two negative GDP growths for two consecutive quarters, a recession occurs.
The government has a role of achieving high economic growth as well as keeping the level of inflation as low as possible. Both economic growth and inflation are influenced by aggregate demand, the long run trend rate, and productive capacity. In a situation where the economic growth is as a result of total demand rising above productive capacity, and it is more than the long run trend rate, then it will lead to inflation; where an increase in productive capacity causes economic growth, such growth will be sustainable, and no inflation will emerge. However, in cases where the economy is experiencing cost-push inflation, negative economic growth and inflation occur at the same time. The rapid economic growth rate has a severe impact on the economy because it leads to rising of the prices of commodities due to high demand, higher wages in the market as a result of low unemployment and a high cost of production. This phenomenon causes enormous pressure on wages and prices and as a result causing higher inflation rate.
The diagram above indicates how aggregate demand causes inflation (Kara & Nelson 143).
To ensure that economic growth is sustainable and does not lead to inflation the government tries to make it equal to the long run trend rate, and at this point, the increase in the capacity of productivity will be same as that of aggregate demand and hence no inflation will result.
The diagram above shows the rate of increase in LRAS is equal to the rate of growth of AD, and therefore an increase in real GDP (Y) does not lead to a rise in prices as they remain constant at P1.
Maintenance of sustainable current account deficit (balance of Payment)
For countries that rely primarily on import goods, an increase in aggregate demand causes a gap in the current account. By avoiding inflation, exports will remain competitive in the global market and as a result reducing the balance of payment. Towards the end of the 1980s, the economic boom experienced in the UK led to a rise in the deficit in the current account which was corrected in 1992 by the recession that stimulated the decrease in spending on imports (Engel, 93).
Low government borrowing by keeping budget deficit less than 3%
The economic crisis of 2008 left most countries in Europe struggling with the massive budget deficit with the UK alone, for example, having a budget deficit of 170.8 billion pounds. For the problem of the budget deficit to end the government needs to adopt some measures to ensure that the budget deficit is decreased without affecting the economic growth negatively. These measures may include tightening of fiscal policy, pursuing expansionary budgetary policy and paying more on benefits.
Low level of unemployment
The government has to ensure that the level of the unemployment in the country is kept low. In seasons of high economic growth the firms hire more employees to help in increasing productivity which leads to falling in the levels unemployment, however, in the long run, it may lead to inflation (Kara and Nelson 134). The government must keep both unemployment and inflation low by ensuring that the economic growth is sustainable.
The Phillips curve depicts how a reduction in the interest rates reduces unemployment as a result of high aggregate demand (Investopedia). Higher aggregate demand will, however, cause inflation (Engel 94).
Minimum inequality in wealth and income distribution
An equitable distribution of wealth and income among the citizens of a nation plays a vital role because it promotes accelerated economic growth. The government, therefore, tries to ensure that there is a fair distribution of resources among all citizens and no one lives below the poverty line.
The methods the government use in pursuing its economic goals
The governments and UK being a perfect example have been able to achieve their objectives by adopting supply-side economics and demand-side economics to pursue these goals.
Supply-side economics
The supply side economics refers to the approach by the government to employ the supply side policies like reduction of income taxes, making labor markets flexible as well as forging good relationships with the trade unions. Reducing taxes will act as an incentive for firms and individuals to invest which will, in return, lead to job creation, high economic growth and a resultant increase in government revenues. Arthur Laffer developed the concept that reveals how tax reduction cause high tax revenue, and this concept can better be illustrated by Laffer’s curve that shows the relationship between the amount of tax revenue and tax rate (Investopedia).
In a country where labor markets have a lot of restrictions there is no initiative to invest, and in fact, the existing companies get discouraged from hiring more employees. To boost investments countries may decide to make labor markets more flexible by improving labor mobility which will, in turn, enhance supply-side performance and labor productivity as well.
Similarly, the problem that the economies are facing as a result of poor relationships between the governments or employer and the trade unions makes it difficult to achieve efficient labor productivity. It is therefore prudent for governments to reduce the powers these unions have or privatize state corporations to increase efficiency and labor productivity.
Demand-side economics
The demand side economics make use of demand-side policies that aim at influencing output, inflation as well as employment by increasing or reducing the aggregate demand. These policies include fiscal policy and monetary policy. In situations where the economy is experiencing recession the expansionary demand-side policies are used to increase spending while in an inflationary economy, the government uses the contractionary policies to help cut down the expenditure
Monetary policy involves reduction of interest rate by the government to stimulate an increase in aggregate demand. Low-interest rates discourage saving while encouraging spending since consumers has a more disposable income to spend. Also, low-interest rate promotes investment and also decrease the cost of borrowing. The UK government employed this monetary policy strategy after 2008 economic crisis where the interest rates went down to 0.5% (Carlberg 234).
Source: (Philip)
Fiscal policy, on the other hand, involves stimulating aggregate demand in the economy by reducing income taxes and raising government expenditure (Carlberg 233). The concept is based on the theory that lowering disposable tax income will increase disposable income which will encourage consumers to spend more (Philip). Increase in government spending increases economic growth leading to high employment and low unemployment in the economy.
Comparison between UK productivity with Italy and Germany
The average productivity growth for the UK between 1997 and 2007 was higher than all the other G7 nations by 0.2%. However, after the economic crisis of 2008, the other G7 countries recovered, and their productivity became stronger than the UK. In 2016 the GDP per hour worked for in the UK was 9% and 25.6% below Italy and Germany respectively. The output per employee for the UK was 15.1% below these two countries the same year. The comparison between UK, Germany, and Italy for the average growth rate of productivity since 2007 shows that UK is sixth just one position above Italy in the G7 with Germany coming 4th. The graph below shows the productivity growth rate of the members of G7 from 1997 to 2016 (Joe).
Source: (Joe)
Conclusion and Recommendations
The government has a responsibility of minimizing inequality in the distribution of wealth and income, lowering the level of unemployment, maintaining a sustainable current account deficit, ensuring that there are sustainable economic growth and a low inflation rate. The UK government must adopt either supply-side economics or demand-side economics which will offer the answers to unemployment, inflation, and economic growth issues in the economy. I would suggest that the UK government need to reduce the restrictions in the labor markets as well as try cutting the powers of trade unions to enhance labor productivity and encourage firms to hire more people. Similarly, the UK government can improve labor productivity and efficiency by privatizing of some state corporations.
Work Cited
Carlberg, M. (2007). Monetary and fiscal policies in the Euro area. Hamburg. P 234
Engel, C. (2011). The Real Exchange Rate, Real Interest Rates, and the Risk Premium. Cambridge, Mass: National Bureau of Economic Research. P 93
Investopedia. Laffer Curve. https://www.investopedia.com/terms/l/laffercurve.asp
Joe .T, (2017). Recession: What Causes a Recession? And How Close Is The Uk To It? Https://Www.Express.Co.Uk/News/Uk/825592/Recession-Definition-What-Causes-Financial-Crash-Credit-Crunch-Uk-Close
Kara, A. and Nelson, E. (2003). The exchange rate and inflation in the UK. London: Centre for Economic Policy Research. P 143
Kates, S. (2010). Macroeconomic theory and its failings. Cheltenham, UK: Edward Elgar Pub. p34
Philip, A. (2011). Government Must Make 'Tough Policy Choices' To Avoid Recession, Warns Bcc Https://Www.Telegraph.Co.Uk/Finance/Financialcrisis/8818904/Government-Must-Make-Tough-Policy-Choices-To-Avoid-Recession-Warns-Bcc.Html
