PROBLEMS OF MACROECONOMICS

PROBLEMS OF MACROECONOMICSAiou Info

  1. Problem of Unemployment

The classical economists the pioneers of macroeconomics believed in full employment, I.e., all the resources f the economy are fully employed in accordance with their capabilities. The labor force in the economy is fully employed, hence there is no possibility of unemployment in the country. The classical economists presented as well as proved their theory of full employment with the help of goods market, labor market, money market and credit market. According to classical economists, market forces operate in such a way that full employment is restored automatically.

But such utopia of full employment could not exist for ever. The Great Depression of 1930’s brought about a lot of miseries in the form of slump and vast unemployment when millions of people were wandering in the streets of London and New-York in search of jobs. J.M Keynes wrote his book  General Theory’ in 1936 where he rejected the philosophy of full employment. According to Keynes equilibrium level f national income may be at full employment, at above full employment, and at below full employment, and at below full employment. Thus, according to Keynes, a capitalist economy may even experience unemployment. The unemployment which rose during the 1930’s is attributed t deficiency of aggregate demand. During the 1930’s Great Depression, unemployment rose as a major macroeconomic problem. To remove the unemployment Keynes suggested for state Intervention. He stressed upon printing of new money and enhancing the job opportunities by introducing public works programs. This means that unemployment, according to Kernes, can be removed with the help of deficient budgets on the part of the government. In order to see more about unemployment, its types and measures to remove it.

  1. Problem of inflation

During the 1930’s, the phenomenon of unemployment got a lot of attraction. Therefore, most of the policy experts offered their thoughts to remove unemployment. As a result, the government intervention was legitimized against the traditional Laisseze-Fair of the classical economists. The government expenditure went on increasing to enhance employment; to provide social security; and to provide better social and economic services etc. The state intervention encourage the growth of public sector and public spending. In this situation the normal budgets of the governments were inadequate. So the governments had to restore the deficient financing. This state of affairs led to enhance aggregate demand in the economy. The increased demand for goods and services due to population growth also encouraged aggregate demand. The ruthless craze to get economic superiority and remove unemployment the industrialization was also considered something necessary. In this way, the investment expenditures also increased. Thus, during 1950 to 1970, the greater increases in public savings, private spending and investment spending greatly pushed the aggregate demand in the economy. With this the phenomenon of Demand pull inflation was observed. In the first half of 1970’s, consequent upon certain supply shocks like oil crises etc. The aggregate supplies declined-unable to match the rising demand. In this way the costs of production and prices increased along with reduced production and employment. As a result, a situation of inflation coupled with unemployment was observed in the world-which was given the name of “ Cost-Push Inflation”. During the 1970’s and even till the present time the phenomena of rising inflation and rising unemployment is commonly observed throughout the world. Meanwhile, in the economic literature a bitter reality was inflation and unemployment. It means that if any economy wants to reduce the level of unemployment, it will have to accept the rise in price level.

Thus, we find that the most of the macroeconomics, at present, deals with the problems of unemployment and inflation. To remove these problems or attain economic stabilization, Fiscal and Monetary Policies’ were advocated.

  1. Problem of Growth

In the late 50’s and in the early 60’s the problem of growth got a lot of attraction. It means that the poor and developing countries of the world wish to attain a rise in their real national and per capita incomes. Again, the developed countries of the world who have attained greater rise in their national and per capita incomes wish to maintain them in the presence of rise in their national and per capita incomes wish to maintain them in the presence of rise in capital, rise in labor and change in technology etc. It means that this has been a matter of great concern for the recent economists that what should be the level of rise in investment that mature economies could maintain their attained levels will result in the fuller utilization of change in labor force, change in capital accumulation and change in level of income. Accordingly, in this regard the post Keynesian economists have presented a lot of Growth Models’ as ‘Harrod-Domar model’, ’Solow-Swan model’, ‘Meade Model’, ‘Kaldor model’ and ‘Mrs. Joan Robinson model,’ etc.

Thus, now a day’s macroeconomics deals with the problems of growth – a situation far above the full employment. It is reminded that full employment and growth are not synonyms. Full employment means the maximization of output and employment in the presence of existing resources while economic growth is attached with potential increase in output and employment in the presence of increase in capital, increase in labor force, increase in natural resources and technological change. The full employment corresponds to the existing production frontier of the economy while economic growth has the effect of shifting the production frontier of the economy while economic outward.

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