Understanding Macroeconomics: Key Concepts and Theories

Posted on Mar 6, 2025 in Economy

Aggregate Demand and Supply

Aggregate demand is the total number of acquisitions that different economic sectors are willing to make in a certain period of time at a certain price level. Aggregate supply is the amount of product that companies are willing to offer in a certain period of time, with a determined level of wages and prices.

Inflation and Deflation

Inflation is the process in which the price of an economy increases continuously and generally over time. Deflation is the process in which prices in an economy are reduced continuously and generally over time; it is the opposite process of inflation.

Understanding CPI and Inflation Rate

CPI (Consumer Price Index) is a statistical measure of changes in the overall price of goods and services consumed by the population resident in a country. The inflation rate is the difference between two CPI indices expressed as a percentage of the value of the index in the first year. Core inflation excludes unprocessed foods (mainly agricultural) and energy (or the first imported raw energy) from the CPI basket.

Causes and Effects of Inflation

Causes of inflation: Inflation can be caused by excess demand, excess money supply, supply costs, or structural causes.

Effects of inflation:

  • Reduces the competitiveness of products in the country.
  • Hampers the information function of prices.
  • Erodes the purchasing power of money.
  • Adversely affects long-term investment.
  • Damages creditors and favors those who have debts, but at the nominal cost of money.

Unemployment

Unemployment is the situation facing workers who, although in a position to undertake gainful employment, cannot find employment.

Understanding Population and Unemployment Rates

  • Active Population: The set of individuals in a society that is of working age and able to work, or wants to have gainful employment.
  • Inactive Population: Includes underage individuals, pensioners, and people who are unwilling or unable to work.

Key Rates:

  • Unemployment rate: (Unemployed / Active Population) x 100
  • Activity rate: (Active Population / Total Population) x 100
  • Employment rate: (Employed / Working-age Population) x 100

Economic Theories of Unemployment

Neoclassical Theory

Neoclassicals consider the labor market in the same way as other markets for goods and services. Wages are the price to be paid for services rendered by the factor of work: the higher the salaries, the smaller the amount of work requested by companies, and the larger the amount offered by workers.

  • Voluntary Unemployment: Exists at the balance between supply and demand, typically with low salaries.
  • Involuntary Unemployment: Due to external factors, e.g., minimum wage. If wages cannot descend, companies will not hire more workers.
  • Frictional Unemployment: A provisional situation caused by the process of finding work; it lasts as long as the job search.
  • Structural Unemployment: Happens due to imbalances in the location and qualifications between supply and demand.

Keynesian Theory

Keynesians believe the main cause of unemployment is the inadequacy of aggregate demand.

Economic Cycles

Economic cycles are fluctuations in the economy, upward and downward, over time. Phases:

  • Recession: A drop in the pace of economic activity.
  • Trough: The lowest point of the cycle, characterized by a high level of unemployment and low demand in relation to the productive capacity of the economy.
  • Recovery: Begins when expectations about the economic climate improve.
  • Upswing: The culmination of a recovery cycle.

Taxes and Fiscal Policy

Taxes: Payments that must be made obligatorily by subjects as expected by the standard.

Tax Principles

  • Equity: Pursuing a tax system where the tax burden is distributed reasonably.
  • Benefit: Those who benefit most from public services pay more.
  • Ability to pay: The richest pay more.
  • Neutrality and Simplicity

Types of Taxes

Taxes can be direct, indirect, proportional, progressive, or regressive.

Fiscal Policy

Fiscal policy is the set of decisions on spending, taxes, and transfer programs affecting income and expenditure to achieve the objectives of economic policy.

  • Expansionary: Involves a decrease in taxes, leading to increased production and employment levels.
  • Contractionary: Tries to cool the economy, causing a reduction in aggregate demand and reducing pressure on prices.