Macroeconomics Policies and Concepts

Introduction 

Economics has two major subdivisions namely microeconomics and macroeconomics. Macroeconomics is a field in economics that examines the economy in general. It studies the various movements and trends that are specific to an economic environment (Samuelson & William, 2005). This includes economic growth, lack of employment, exchange rates, inflation, and budget deficits among others. On the other hand, microeconomics is a field in economics that deals with a certain aspect of the economy. It examines the process in which firms and families make a decision. Besides, it seeks to establish marketplace interactions between households and companies. Microeconomics views households as both the suppliers of production factors and the consumer of goods and services. Additionally, it examines firms in two perspectives, i.e. as suppliers of products and services and as the demanders of production factors. 

Association between Microeconomics and Macroeconomics 

Since most of the economic events that are analyzed in macroeconomics originate from the association between households and businesses, it is true to say that microeconomics forms a foundation for macroeconomics. When studying economics in general, economists ought to focus on the choices that the various players in the economy make. A good example is when determining the gross savings. This would require economists to have insight on the decisions that individuals had to make. In this case, the decision to save is largely influenced by the interest rates. Notably, interest rates (a microeconomic) will determine whether there would be an increase or decrease in gross savings (a macroeconomic issue) and consumption. 

Macroeconomics and the Society 

Research has found out that macroeconomic events directly influence the members of the society. As such, businesspersons who are examining the trend in demand for their goods and services ought to first anticipate income growth of the consumers (Baumol & Alan, 2006). On the other hand, individuals with fixed incomes and those on pension schemes are also concerned about the increase in price since it affects the cost of living. Additionally, the unemployed people have the faith that the economy would grow rapidly so that businesses or rather companies should increase their task force. This is just some of the ways in which macroeconomics affect the society today. 

Concepts of Macroeconomic 

Most firms strive to ensure that they achieve high output rates as well as an increase in consumption of their goods and services. In order to assess the performance of various firms, economists often use these two factors. Nevertheless, there are three principles or rather concepts that are essential when examining the success of firms. These are output, the rates of unemployment, and inflation. 

Output 

Output refers to the total goods and services that a firm produces. The term gross domestic product (GDP) is usually used to indicate a number of products and services that a firm produced for a period of one year (Baumol & Alan, 2006). GDP is the best measure of economic growth (EG). Notably, the best indicator for economic growth is a sustainable upsurge in GDP over time. An increase in GP indicates that a firm has been consistently increasing the number of products and services over time. It ought to be noted that there is dissimilarity between economic growth and economic development. Economic development is an expansion of economic growth. It is defined as a multifaceted change process that aims at bettering the state of the community and the country in general (Barro & Redlick, 2009). It is more of a life-sustaining process that seeks to ensure that the various players are able to access their basic needs. This, on the other hand, improves the living standards of the people. 

Presently, economists are establishing many theories that have seen firms moving beyond GDP to determine their economic development. This has seen more firms striving to ensure that their firms have healthcare facilities, diverse training programs, and autonomy among others. This is done to ensure that the working condition is favorable to all the employees. Despite the fact that GDP is a vital element, it cannot be used as a sole measure for economic development. Currently, vast aspects have been put forward to explore alternative measures for economic development. These include the eliminating barriers and availability of infrastructures among others. 

Another good measure for EG and development is the accumulation of capital. In firms, this is measured by how much the organization has invested in infrastructure. When a firm accumulates more capital, economic inequality within the organization will show drastic changes. Supposedly, when firms are in their initial stages of development, the distribution of income usually seems to be equal. This is because of the low levels of capital and per capita income. As firms continue to grow, there is an exponential accumulation of capital which results in unequal distribution of income. This will favor individuals who own the capital. Nevertheless, as the business becomes more developed, the levels of inequality will decline indirectly by firms indulging in social activities or indirectly by ensuring that the employees get more benefits from the firm. 

Economists often use two methodologies to determine EG and development. These are cross-sectional and time-series analysis. In the former case, macroeconomists usually compare the economy of a particular firm with other firm’s economies. In the latter case, they often study trends in a firm’s economy over time. In so doing, the economist will be in a position to tell why the economy of some firms grows rapidly while in others it is showing a slower trend in growth. Such revolution would help businesses to ascertain how they can improve their performance over time. 

Despite the fact that many firms desire a sustainable growth, it is apparent that the growth can never be steady. There are points where the business will experience slow down and instances where expansion will be felt. A reduction in economic growth in referred to as recession (Baumol & Alan, 2006). Where the growth is very slow, this situation is often deemed as depression. In times of recessions, there is a reduction of income due to a decrease in demand for products and services from the firm. Consequentially, firms will make little revenues and chances of the business collapsing will be high. Regressively, two situations will be created. First, many people will end up losing their jobs and second, job opportunities will be scarce. 

Nevertheless, there are instances where the economy of the firm grows abnormally fast. Economists refer to such periods as expansions. Where the expansion is very massive, the term boom is used. Thus, the business will be said to be booming. Normally, expansion is characterized by rapid growth, increased profits, higher wages, promotions, and an increase in demand for products and services from the firm. Due to the high revenues generated by the business, more employment opportunities will be created. Owing to the merit that expansion offer, macroeconomists are currently studying economic fluctuations. Besides, they seek to establish whether policymakers are in the position to stabilize the process. 

Rate of Unemployment 

The other vital principle of macroeconomics is the rate of unemployment. This concept provides a clue about the real situation in the labor market. The rate of employment refers to the percentage number of individuals who are ready to be employed at the current wage rate but they cannot secure an employment opportunity (Baumol & Alan, 2006). Basically, high rates of unemployment implied that it is not only hard to get a job. Rather, it also means that firms will not be able to increase the wages of the employees as well promote them to higher positions. On the contrary, low rates of employment indicate that the economic performance is good. Therefore, firms can increase the wages of its employees. Essentially, there would be increased promotions within the organization and more employment opportunities will be created. In that respect, many economic policymakers strive to ensure that workers maintain their job positions. 

Rates of Inflation 

Inflation is the third vital macroeconomic concept. It refers to the drastic rise in prices. Consumer price index (CPI) is the best measure of inflation (Baumol & Alan, 2006). CPI indicates the variations in the value of money over time. Economists and policy makers are chiefly concerned with inflation since it creates extra costs in the economy. A high rate of inflation erodes the actual value of money. This implies that individuals who are on fixed salaries or those under pension schemes cannot cope up with the high costs of living. This is also true for companies that operate on fixed incomes. Such companies are likely to collapse in times of inflation. Additionally, inflation distributes wealth unequivocally among the population. Inflation has detrimental effects on lenders and workers, but borrowers and employers have plenty of merits to enjoy in such times. This is because the majority of the workers and lenders operate on contracts that explicitly define the terms of money. In addition, inflation kills the urge to save. Notably, income tax threatens the interest that is gained on savings from income. Despite the fact that the nominal interest that can cater for inflation, the amount gained after taxation is reduced hence making savings be a less attractive venture. 

Historical Perspective of Macroeconomics 

In ancient times, the economy did not distinguish between microeconomics and macroeconomics. Nevertheless, Adam Smith brought in a new dimension of economics in his book “The Wealth of Nations” that was published in 1776. He proposed a classical theory that suggested that price adjustment would be essential in equating demand and supply in the market (De Vroey, 2015) . In so doing, he believed that free markets would be efficient in their operation. Adam Smith noted that the market has an automatic way to correct imbalances between demand and supply that would help in flexing prices. Therefore, he advocated the need for government intervention to be kept at a minimum in the market. Smith argued that the flexibility that resulted would be instrumental in ensuring that the macroeconomic equilibrium is a product of automatic correction. The theory proposed by Adam Smith suggested that governments could utilize additional production inputs to improve the production potential hence improving the nation’s income. 

In 1929, the United States experienced the worst depression that led to high rates of unemployment and decreased wages. The depression made economists doubt the validity of Smith’s classical economic theory. This made economists believe that there was the need to invent a new theory to explain the economic meltdown that had been experienced at that time. The breakthrough was revealed in Keynes book “The General Theory of Employment, Interest and Money” that was published in 1963. The book made two important revelations. First, it identified demand as a product of consumption, investment as well as government spending. Secondly, it showed that government spending was essential in sustaining full employment. 

Keynes also noted that low demand yielded reduced income and high rates of unemployment which are typical of the economic meltdown. He accused the classical theory of assuming that supply was the only factor that influenced state income and that prices would adjust automatically. On the contrary, Keynes suggested that a change in demand was key in determining national income (De Vroey, 2015) . The Keynesian theory thus did not buy the idea of automatic economic balance that was advocated by Adam Smith. He argues that economic equilibrium can only take place by chance. Importantly, he added that government intervention might be necessary when trying to attain economic stability. 

Presently, the Keynesian model is the widely adopted by most economists since they believe that it is the most applicable when it comes to macroeconomics. Nevertheless, both the classical and Keynesian models are used interchangeably since they are based on macroeconomic concepts. Many macroeconomists utilize the phrase new classical to refer to the shortcoming that the Keynesian theory demonstrated in 1960’s. Under the new classical theory, macroeconomists have shifted their focus to actual business cycle model. This theory explores on some of the assumptions that were made by the classical theorists such as automatic flexing of prices to elaborate on the short-term economic fluctuations. 

Apparently, the novel Keynesian economist perceives that the theories that advocate for market clearing are not in a position to explain the short-term economic fluctuations. Therefore, they propose theories that have sticky income and prices. The research on this model strives to explain the impact that income and prices pose in the short-term. As such, efforts are being directed towards establishing the imperfections in the market which renders income and prices sticky. 

Financial Significance of Principles of Macroeconomics on Selected Firms 

Procter and Gamble Company (P&G) 

Businesses exist with an aim of making profits. This will be determined by two important factors. These are the quantity of products and services it creates and the rate of inflation. These issues affect most business operations. For instance, P&G is a widely known company that manufactures beauty and household products (Kalogeropolos, 2016). Its mother plant is found in the United States. This company has a mandate of producing products that will meet the ever-changing human needs. However, in the past couple of years, the company has experienced a decreased economic growth. Additionally, over the past two financial years, the company has not been able to attain the EPS consensus. Low profits have become typical of this firm and investors are even wondering whether the company can regain its productive potential. 

Initially, P&G was in a state of economic boom. Most of its products were in high demand and the company realized massive profits. In order to increase its GDP, the company employed many employees. Nevertheless, after some years of operation, the company started to realize decreased revenues (Kalogeropolos, 2016). This was due to inflation and stiff completion in the market. As a result, many investors doubted that the ability of the company to redeem itself from such forces. In that period, the shared of the company reduced by 15% and P&G entered into a state of recession. 

Owing to this setback, the company was forced to enter into a restructuring process in order to realize economic growth. However, in the fiscal year 2015, P&G again had trouble due to inflation. In its efforts to address the matter, the leadership of the company decided to increase the prices of its products during that fiscal year. P&G management perceived that increasing price was vital than ensuring the growth of output. Nonetheless, that move plunged the company into depression. Apparently, the firm would have still managed to survive if it would have opted to create a balance between growth and the production volume. Thus, the reduction in GDP was as a result of reduced production volume caused by inflation. 

Starbucks 

Starbucks is another company that was affected by macroeconomic principles. The main macroeconomic concept that affected this company was inflation. Starbucks is a firm that has widely been known for the production of fast foods. Over the past couple of years, the company has been adversely by the effects of inflation. Just like P&G, Starbucks opted to increase the prices of its products so that it can cover the extra costs caused by the effects of inflation. For instance, the price of milk was increased by 27% and that of coffee was increased by 25%. As a result, the prices of the products from this industry went up compared to other restaurants. The increases in price upset many devoted consumers of products from this industry. That led to a decline in the demand for the products from this company. As aforementioned, a decrease in demand leads to a decline in profits. On the other hand, there will be a decline in GDP and thus the economic growth and development of a company will go down. As such, Starbucks experienced a decline in its GDP and development. 

Future Projections 

In order to direct macroeconomics successfully into the three principles, there is the need for firms to employ vast policies and tools. Businesses need to create full employment, ensure price stability and economic growth. There is the need to adopt the fiscal and the monetary policy in order for businesses to realize such objectives. The monetary policy involves embracing methodologies that would see banks, firms and people getting involved in ensuring that changes relating to money supply and demand as well as interest rates are effected. Money is an important medium of exchange. Therefore, the manner in which money is defined and measured is key in managing the economy. Essentially, firms need to understand that investments and savings are the vital aspects that influence the interest rates. 

Conclusion 

Macroeconomics is an important aspect of all business activities. It studies the various movements and trends that are specific to an economic environment. There are three principles or rather concepts that are essential when examining the success of firms. These are output, the rates of unemployment, and inflation. All these concepts are usually used in tandem when examining how successful nations and firms are in their partaking. For instance, this article has demonstrated how inflation leads to a decline in GDP which on the other hand leads to a decline in revenues. A decline in revenues will result to firms laying off some of their employees in an attempt to lower production costs. In addition, some firms may opt to increase the prices of their commodities and they end up losing their consumers. That leads to a decrease in demand, hence a decline in revenues. 

References 

Barro, R. J., & Redlick, C. J. (2009). Macroeconomic effects from government purchases and taxes (No. w15369). National Bureau of Economic Research . Retrieved from http://www.nber.org/papers/w15369. 

Baumol, W. J., & Alan S. B. (2006). Macroeconomics: Principles and Policy . 10th ed. Mason, OH: Thomson SouthWestern. 

De Vroey, M. (2015). A History of Macroeconomics from Keynes to Lucas and Beyond, Cambridge: Cambridge University Press, ISBN: 9781107584945 

Kalogeropoulos, D. (2016). Will 2016 Be The Procter & Gamble Company's Best Year Yet? The Motley Fool. Retrieved from http://www.fool.com/investing/general/2016/01/01/will-2016-be-the-procter-gamble-companys-best-year.aspx. 

Samuelson, P.A., & William D. N. (2005). Macroeconomics . 18th ed. Boston: McGraw-Hill/Irwin.