Understanding Macroeconomic Forces: Supply, Demand, and Policy
Understanding Macroeconomic Forces
Internal forces are determined by the market behavior of economic agents in a country and are expressed through the free interplay of supply and aggregate demand.
The Average Level of Prices
The average level of prices is the weighted average of prices of all goods and services in an economy.
Macroeconomic Market
This involves matching buyers and sellers with their spending plans and production. Differential change is short-term productive capacity of a country, but not so with aggregate demand.
Aggregate Demand
Aggregate demand is the total expenditure for a given average price level that families, businesses, the public sector, and foreigners are willing to perform in an economy.
Aggregate Demand vs. GDP
Are aggregate demand and GDP the same? No. Aggregate demand is the value of final goods and services that players are willing to buy, while GDP is the value of what is actually purchased.
Aggregate Supply
Factors that condition the supply and administration are: the average level of prices, costs of production, and business expectations.
The aggregate supply of production describes the amount companies are willing to sell at an average level of price and certain production costs.
Consumption
The main component of this macro is private consumption. Private consumption is usually the largest component of aggregate demand in developed countries. It refers to the expenditure of families or consumers and includes the following categories of goods:
- Durable goods
- Perishable goods
- Services
Business Investment
Business investment is one of the most important components of aggregate demand. Investment means acquiring goods that satisfy human needs because they contribute indirectly to future production; that is, they are used to produce other goods.
Functions of Business Investment
Business investment plays two important functions:
- Demand pull: It lifts the productive capacity installed in the country.
The investment of companies includes three main categories:
- Investment in plant and equipment
- Construction
- Changes in inventories
Factors Conditioning Investment
- Revenue costs (interest rate or taxes)
The Multiplier Effect of Investment
Investment and public expenditure produce a multiplier effect on the country’s production. The investment multiplier is the total increase in spending experienced throughout the economy by increasing investment.
Investment Profitability = (Investment Return / Initial Investment) * 100
Total Spending Increment = Initial Investment * [1 / (1 – MPC)] where MPC = marginal propensity to consume in terms of percentage.
Economic Policies
Objectives or Purposes
The most common goals of economic policies are:
- Sustainable economic growth
- Full employment
- Price stability
Types of Economic Policies
To achieve their goals, states use economic policies that have the capacity to influence economic variables. These include:
- Fiscal policy
- Monetary policy
- Foreign policy
- Incomes policy
Economic policies are forms of state intervention in the economy towards the attainment of economic objectives related to production, employment, and prices, driving variables such as government spending or the price of money.
Fiscal Policy
Fiscal policy is intended for the public sector through fundraising and the application of public expenditure to achieve the objectives pursued by the state.
Effects on the Economy
- Expansive: Increased public spending, lower taxes! (disposable income, consumption, investment, employment, aggregate demand, production prices)
- Restrictive: Tax increase, public expenditure down!
Budget
- Balanced budget: Revenues = Expenses
- Deficit: Expenses > Income
- Surplus: Income > Expenses
The public deficit rises when spending is more than earnings, which increases the amount of money in circulation, with the aim of increasing production levels. When revenues are insufficient to cover expenses, they may operate by:
- Issuing public debt
- Raising taxes to increase money in circulation