Macroeconomic Fundamentals: Objectives, Circular Flow, and Business Cycles

Posted on Nov 2, 2025 in Economy

Microeconomics and Macroeconomics: Defining the Scope

Microeconomics focuses its study on individual units of consumption and production, the functioning of specific markets, and the formation of prices.

Macroeconomics offers a simplified view of the functioning of the entire economy through aggregate variables, often called macro variables. These include the National Product (PN), National Consumption, and Public Expenditure (GP).

Key Macroeconomic Objectives of Government Policy

The government typically pursues the following objectives:

  • Economic Growth (CRECIM.): Refers to the increased production of a country. As the economy grows, so does employment, citizen income, and consumption, thereby boosting the production of companies. Economic growth is measured using the Gross Domestic Product (GDP).
  • Price Stability: Achieved when prices neither rise nor fall too quickly, indicating an absence of significant inflation or deflation. Price stability is measured by the Consumer Price Index (CPI).
    • Inflation measures the growth of prices. High inflation lowers the purchasing power of money and slows economic growth.
    • Deflation is the opposite process, characterized by a general fall in prices.
  • Lowering Unemployment Level: This problem affects the portion of the workforce that cannot find paid work. Unemployment reduces citizen income and slows economic growth. It is measured with the unemployment rate.
  • Sound Public Finances: The State’s accounts, reflected in the General Budget, track its expenses and income. Higher economic growth typically leads to an increase in tax income. A deficit occurs when Public Expenditure (GP) exceeds Public Income (Ingr.P.).
  • External Sector Equilibrium: The result of a country’s transactions with the rest of the world, reflected in the balance of its balance of payments and the exchange rate of its currency. All countries attempt to at least match the number of exports with imports so that debt is minimized.

All these objectives are achieved through the application of economic policies (monetary and fiscal).

The Circular Flow of Income

The circular flow of income schematically represents the exchange relationships that exist between the economic agents (households and firms).

Market Transactions

Upper Part: Market for Goods and Services (B&S)

This part involves two streams:

  1. Real Stream (Continuous): Reflects the goods and services produced by companies. The sum of the production of all firms in a country is called the National Product (PN).
  2. Monetary Stream (Discontinuous): Shows the expenditures of families when they buy goods and services produced by companies. This is the National Expenditure (GN).

Lower Part: Market for Factors of Production

This part also involves two streams:

  1. Real Stream (Continuous): Factors of production (labor, capital, land) provided by families to carry out the process of production.
  2. Monetary Stream (Discontinuous): Income received by families for the factors of production offered to the company. This is the National Income (RN).

The Fundamental Identity

The fundamental identity of the circular flow states that:

National Product (PN) = National Income (RN) = National Expenditure (GN)

Calculating National Product (NP) in Three Ways

Based on this equality, the National Product can be calculated in three ways:

  1. Via Production: Evaluation of the production of companies in a country during a determined time period. (Equals PN)
  2. Via Total Expenditure: Total expenditure by economic agents on purchasing goods and services. This matches the aggregate demand or National Expenditure (GN).
  3. Via Income: The resulting National Income (RNac). This is the total income received by economic agents, calculated as the sum of rent, salaries, and other forms of income.

Understanding the Business Cycle

The business cycle refers to the fluctuations in economic activity that lead to periods of upturns and downturns. The economic situation of a country varies over time and exhibits a cyclical behavior.

Phases of Economic Fluctuation

The phases succeed each other constantly, though with different durations and intensities. The four main phases are:

  • Trough (Fund): The lowest point in the cycle where the trend changes toward recovery.
  • Recession: A decline in economic activity characterized by a fall in consumption, production, employment, and prices. If this decline persists for a considerable time, it is referred to as a depression or crisis.
  • Expansion: Economic activity grows, characterized by increases in consumption, production, employment, benefits, investment, and prices.
  • Peak: The highest point of the cycle before the recession begins.

The main problems associated with the cycle are Unemployment (during recession) and Inflation (during expansion).