Explaining long-run economic growth

Comprehension check.

SUPPLEMENTARY READING

SPEECH PRACTICE

1. Speak on the subject of economics, its central problems, branches and methodology.

2. Dwell on the essence of the microeconomic analysis.

3. Dwell on the essence of the macroeconomic analysis.

4. What branch of economics would you like to specialize in? Give some examples to prove your choice.

5. Choose any urgent micro or macro economic problem and make a short report on it. Refer to different additional sources to make your report interesting, instructive and informative.

ECONOMY: GROWTH AND FLUCTUATIONS

Macroeconomics is the branch of economics that tries to explain how and why the economy grows and fluctuates over time. The general upward path of the economy is the result of slow-moving forces – increasing population, more factories and machines, and better technology. Recessions – periods of declining total output – and other fluctuations divert the economy from a smooth growth path. Macroeconomics tries to explain growth and fluctuations using the standard principles of economic analysis.

The other branch of economics is microeconomics – the study of the behaviour of individual consumers, firms and markets. There are two ways that microeconomics differ from macroeconomics. First, microeconomics is more concerned with how one market differs from another than with how the economy as a whole grows and fluctuates over time. Second, macroeconomics explains the determination of variables that microeconomics considers given. These variables include national income, the price level, and interest rates. Although it has different objectives, macroeconomics employs the basic ideas of microeconomics.

When macroeconomists try to explain growth and fluctuations, they must look at the behaviour of consumers and firms, the organization of labour markets and industry, the workings of financial markets, and even the machinations of government. They rely on microeconomics when they do so. Good microeconomics is a necessary but not sufficient condition for good macroeconomics.

1. What economic phenomena do microeconomics and macroeconomics study?

2. In what ways do these economic sciences differ?

At the core of any macroeconomic theory is an explanation how the economy responds to economic forces. How does GDP adjust when a new technology is introduced, when foreigners decide to purchase a smaller amount of U.S. exports, or when Americans decide to import rather than buy similar domestically produced goods? What if the price of oil quadrupled because a cartel of foreign producers cuts back on oil production?

In constructing an explanation of how economy responds to these forces, the macroeconomist constructs a model. A model is simply a description of the economy expressed in graphs or equations. It shows how the decisions of consumers and firms interact with each other in markets to determine output and other variables.

Macroeconomists use a long-run growth model to study the general upward path of the economy over time. The growth model focuses on the amount of labour and capital that go into the production of goods and services. Labour and capital work together to produce output. The long-run growth model also shows how the resulting output goes partly to consumers and partly to businesses in the form of investment in additional factories and equipment. The long-run growth model looks at the economy after it has adjusted completely to a shock, such as an increase in foreign demand or a decline in government spending.

This is an important simplification, because such shocks are frequent and the economy is always in the process of adjusting to one shock or another. The adjustment can sometimes last a long time and can involve recessions and other departures from the economy’s longer-term growth path.

Дата добавления: 2014-11-29