Microeconomics encompasses the study of households and firms relatable to decisions and interaction of stakeholders in the marketplace. The core principle in this case is that households and firms seek to optimize for themselves the best / yield and dividends in the backdrop of their objectives and the constraints they face. Microeconomic models dwell upon the ways and means adopted by the households and entrepreneurs to maximize their level of satisfaction, which economists attribute as utility.
When the decisions of individual economic actors are reviewed, total consumer spending in relation to aggregate variables denominating many individual decisions reveal that macroeconomic indicators are dependent on microeconomic foundation.
Scope of Macroeconomics:
The scope of macroeconomics is inclusive of the ingredients as enumerated below:-
Theory of National Income (NI): National income has wide ranging concepts with respect to measurement.
Theory of NI Determination: Primarily macro-economics deals with the theories of National Income as to its determination inclusive of classical and Keynesian theories of national income and employment.
Theory of NI Fluctuations: Economic activities are exposed to boom and recession at periodic intervals known as trade cycles. In this context a lot of theories have been expounded including that of, "Samuelson's Multiplier-Accelerator".
Theory of Consumption and Savings: Macroeconomics is relatable to consumption whose counterpart is Saving. Keynes Relative Income Theory", "Friedman's Permanent Income Theory" and "Modigliani's Life Cycle Income Theory" are various facts of the same denomination.
Theory of Money: It studies the effects of changes in supply of money on the economy particularly as to how it is impaired by inflation and deflation There are other related factors such as demand pull cost push inflations and a Philips curve.
Theory of Economic Stabilization: In capitalist economics, inflation, unemployment, unequal income distribution, misallocation of resources, deficit in Balance of Payment and budget deficits are the routine problems. Government has to intervene with the help of Fiscal and Monetary Policies as the same effects the economic position of the country.
Theory of Growth: Keynesian model of income and employment is relevant to static and comparative static situations. A lot of dynamic growth models in macroeconomics dwell upon growth path of the economy, effect of change in population.
Concept Related to National Income
According to the economic Survey 2011-2012 the growth rate of GDP for 2011-12 was estimated at 4.2 percent on account of 3.4 percent growth in Agriculture, 2 percent growth in Large Scale Manufacturing and 5 percent in services sectors.
Gross Domestic Product (GDP)
Domestic product means total value of production done within a country to the exclusion of incomes received by its nationals from their property in other countries, or the amounts received for services rendered abroad. It only records what is the sum total of incomes when goods and services are produced inside a country. Usually two kinds of firms work in a country. Total value of output by all kinds of firms, which they produce inside Pakistan, is included in GDP of Pakistan.
GDP of a country for some year is the total value of goods and services, which it produces within its geographical boundaries. Thus production of multinational companies is included in GDP of Pakistan. The salary of Japanese engineer working in HONDA factory in Lahore is also included in national GDP, since he performs his services in Pakistan. On the other hand, income of a Pakistani working in other countries is not counted in its GDP since the services have been rendered outside Pakistan.
Used Goods
The sale of used goods is not included as part of GDP.
The Treatment of Inventories
In above transaction of used Goods, the transaction affects neither expenditure nor income, GDP. This negative spending by the firm offsets the positive spending by consumers, so the sale out of inventory does not affect GDP. This treatment of inventories ensures that GDP reflects the economy's current production of goods and services.
Intermediate Goods and Value Added
For the economy as a whole, the sum of all value added must equal the value of all final goods and services.
Housing Services and Other Imputations
If GDP is to include the value of these goods and services, we must use an estimate of their value. Such an estimate is called an imputed value.
UNEMPLOYMENT IN PAKISTAN
Two most important economic problems of modern world are unemployment and inflation. This is also true of Pakistan.
One of the major permanent economic problems faced by Pakistan is widespread unemployment and underemployment.
Unemployment is the situation where an able-bodied person seeks a job but is unable to find one at current wage rate. Under employment is the situation with either (i) a labourer has job not matching with his education and training level or (ii) he has only part-time job although he wants full-time work.
The Labour Force is defined as the sum of employed and unemployed, and the unemployment rate is defined as the percentage of the labour force that is unemployed. This is,
Labour Force = Number of Employed + Number of Unemployed,
and
Unemployment Rate = Number of Unemployed X 100
Labour Force
A related statistic is the labour-force participation rate, the percentage of the adult population that is in the labour force:
Labour-Force Participation Rate = Labour Force X 100
Adult Population
The Bureau of Labour Statistics computes these statistics for the overall population and for groups within the population: men and women, whites and blacks, teenagers ad prime-age workers.
Existence of unemployment and underemployment indicates imbalance between demand and supply of labour. Unemployment causes wastage of a country's human resources. It is not only lack of income for the individual and country but also is the root cause of many social and political problems. The unemployed, besides losing income, will suffer from boredom, depression, family tensions, divorces, violence and tendency towards crime. The present situation in Pakistan is that out of 181 million population, out labour force is 58 million. Out of this, 4 million are totally unemployed while about 6 million are partially employed. The rate of open unemployment does not appear to be too high but a large part of unemployment is concealed (which is called disguised unemployment). In Pakistan, all unemployed persons are not recorded.
Labour Force and Employment Estimate for 2012
Total population 181 million
Working age population (age 10-65) 140 million
Labour force 58 million
Employed labour force 54 million
Unemployed labour force 4 million
Open rate of unemployment 6 %
Disguised unemployment / underemployment 12 %
Labour force participation rate 33 %
(% of labour force in total population)
INFLATION
Measuring the Cost of Living: The Consumer Price Index
Coulborn beautifully defines the term as:
"Too much money chasing too few goods."
A dollar today doesn't buy as much as it did 20 years ago. The cost of almost everything has gone up. This increase in the overall level of prices is called inflation, and it is one of the primary concerns of economists and policymakers.
The Price of a Basket of Goods
For example, suppose that the typical consumer buys 5 apples and 2 oranges every month. Then the basket of goods consists of 5 applies and 2 oranges, and the CPI is
CPI = (5 X Current Price of Apples) + (2 X Current Price of Oranges)
(5 X 2002 Price of Apples) + (2 X 2002 Price of Oranges)
In this CPI, 2002 is the base year. The index tells us how much it costs now to buy 5 apples and 2 oranges relative to how much it cost to buy the same basket of fruit in 2002.
Causes of Inflation
The most important cause of rising price is excessive increase in money supply. When people have more money to spend they increase demand. If the output does not grow at the same time, prices move up.
In broad terms inflation is of two types.
Demand-Pull Inflation
Keynesians have traditionally argued that inflation occurs because of changes in real variables in the economy. One important Keynesian theory is that inflation is caused by excess demand in the economy. The DMAND-PULL THEORY of inflation says that inflation will result if there is too much spending in relation to output. In an individual market, like the market for bananas, excess demand will lead to a rise in price. The same is true for a whole economy. If aggregate demand exceeds aggregate supply, the price level will rise and therefore there will be inflation.
Cost-Push inflation
A second Keynesian theory of inflation is the COST-PUSH theory of inflation. This argues that inflation is caused by changes in the supply-side of the economy, which increase costs of production. There are four major sources of increased costs.
Wages and salaries. They account for about 70 per cent of national income and hence increases in wages are normally the single most important cause of increases in costs of production.
Imported goods. An increase in the price of finished manufactured imports, such as television sets or cars, will lead directly to an increase in the price level. An increase in the price of imported semi-manufactured goods and raw materials, used as component parts of domestically produced manufactured goods, will feed through indirectly via an increase in the price of domestically produced goods.
Profits. Firms can raise their prices to increase their profit margins. The more price inelastic the demand for their goods, the less will such behaviour result in a fall in demand for their products.
Taxes. Government can raise indirect tax rates or reduce subsidies, thus increasing prices.
There has been a number of occasions in the past when there was a significant rise in prices due to an increase in one of these costs. For instance, all Western economies suffered sharp rises in prices after the four-fold increase in the price of oil of 1973-4.
Effects of Inflation
"Inflation has both positive and negative effects for the economy. But harmful effects are mostly greater than benefits. The asset that suffers most from inflation is cash (and the money kept in the form of current account) because a rupee is always a rupee regardless of what happens to price level, an increase in prices reduces the purchasing power of money."
When inflation starts it is very difficult to control inflation at low rate. Inflation feeds on itself. In most cases the country comes in the grip of high inflation.
Adverse Effects
Increase in Cost of Living
The working classes are hard hit. Wages do not rise at the rate of prices are rising. Those sections of society who have fixed incomes, like salaried class, find difficulty in buying their daily needs.
Income Inequalities Increase
When prices are rising and businessmen and big landlords make huge money, the distribution of income among various classes of society becomes more unequal. Relative position of wage earners becomes weaker.
Decrease in Saving
During rising prices the savings of common people are adversely affected. Greater part of their incomes is used to buy consumer goods.
Less Exports and More Imports
Local goods become costly for the foreigners. They start buying from other countries. So inflation has adverse effect on the balance of payments position.
5. Productive Investment Falls
When prices are rise sharply, speculation and hoarding of commodities is encouraged. A person, by not selling goods for few days, can make huge profits. Thus businessmen become profiteers. Due to fast rising cost of raw materials, investment plans are disturbed.
Favourable Effects
Increase in Production
When prices are rising slowly, the profits of the industrialists and businessmen rise. They try to produce more goods.
Increase in Employment
Because of rise in prices of products, firms try to increase production and employ more workers. If idle resources exist in the economy, they get employment.
Increase in Investment
With the improvement in the prospects of profits, investment activity is boosted. The capitalists become optimistic and readily put their capital in some productive business.
Increase in Economic Development
Low inflation is helpful for economic development. The government increases resources by increasing money supply.
5. Research and Innovations are Encouraged
When industry expands business activities accelerate and the producers allocate funds to research and innovations.
