B) On Macro- and Microeconomics

Russian: Economists know that there is considerable controversy about macroeconomic models because some of them do not match the fluctuations in actual economies. Besides, a lack of clear connection between macroeconomics and microeconomics has long been a source of discontent among economists. What is macroeconomics all about from your point of view?

Foreigner: Essentially, macroeconomics dates from Keynes and I stick to the concepts of Keynesian policies, according to which macroeconomics is a branch of economics concerned with the analysis of the economy in the large.

R.: So, if I get you right, macroeconomists study such economic aggregates as total expenditure, income and production, employment, prices and wages, external trade flows, tax revenues and government spendings, the stock of money and so on.

F.: I'd say that they disaggregate the economy into homogeneous categories and then integrate the determinants of the behaviour of each of these aggregates to provide models of the whole of economy.

R.: Is there a regularity in the behaviour of these economic aggregates?

F.: Yes. Economies develop in cycles. The term "cycle" refers to fluctuations in national economic activity over a period of time. Indicators of the cycle are variations in rates of economic growth, industrial output, capacity utilization, employment and price changes.

R.: What does the length of the cycle depend on?

F.: Fluctuations in the intensity of economic activity can be generated by both internal and external influences. For example, economic production may collapse for a number of reasons: natural disasters, hyperinflation or loss of political control, etc.

R.: As a result of cyclical development an economy may lose equilibrium. What indicators characterize economic equilibrium?

F.: First of all, it is aggregate demand and supply, then I'd mention the general price level, the unemployment rate, general consumption and investment. These are the aggregates that determine the output and the economic growth. If demand exceeds supply the economy is "overheating", which causes inflation, and if demand falls and is behind supply it brings about recession and growing unemployment.

R.: Now we've come to the most important question. How can macro-economic disequilibrium be eliminated?

F.: Economic laws cannot be changed. But governments can influence the economic development through their economic policies.

R.: This idea of the responsibility of the government has become widespread, but how can the government create the proper conditions for market forces?

F.: It is usually done with the help of macroeconomic research and analysis of factors determining volumes of production, employment, interest rates and prices, dynamics of tax collection and government spendings, money supply, as well as instruments underlying the elaboration of the economic policy. Besides, economists study the country's economic interactions with the rest of the world by analysing foreign trade flows.

R.: Asyou've said, the major macroeconomic index is the output. How is it determined?

F.: It can be done with the help of national accounts systems which are sort of macroeconomic statistical schemes for the presentation of the needed information on macroeconomic variables in a systematic way. For example, the System of National Accounts (SNA) has been used by market economies quite successfully for a number of decades.

R.: Yes, we know that the accounts of this system help to answer such basic economic questions as "What and how much does an economy produce?", "Which are the producing sectors?" and "How is the national income divided among the factors of production, notably labour and capital?"

F.: Summing up, I'd say that various indicators which are part of the SNA, allow to measure the total output and factors affecting the economic performance at a given moment. In market economies output is typically defined either in terms of the Gross Domestic Product (GDP) or the Gross National Product (GNP).

R.: What are the practical implications of macroeconomics?

F.: At a practical level, macroeconomics attempts to accomplish three tasks: to explain the changes in economic aggregates, to predict the consequences of certain recent developments, and to guide policymakers in their attempts to influence future events in pursuit of economic objectives.

Words you may need:

controversy n (зд.) разброс мнений

fluctuation n колебание

Keynes Кейнс Джон Мейнард (1883-1946), крупнейший английский экономист и публицист, основоположник кейнсианства

Keynesian adj кейнсианский

branch n (зд.) раздел, область (знаний)

to be concerned with заниматься, касаться

aggregate и агрегат, совокупность

flow п поток

stock of money деньги в обращении

homogeneous adj однородный

integrate v объединять

determinant n детерминанта

regularity n (зд.) закономерность

equilibrium n равновесие

aggregate demand and supply совокупный спрос и предложение

overheat v перегреваться

eliminate v устранять

tax collection сбор налогов

index n показатель

national accounts system система национальных счетов

variable n переменная величина

attempt v делать попытку, стремиться

accomplish v совершать, осуществлять

Ex. 14. Give extensive answers to these discussion questions:

1. Do many countries face fiscal problems? What causes these problems?

2. What measures should countries seeking to overcome fiscal problems take?

3. Do many countries operate fiscal federalism? What about Russia?

4. What are the most desirable features of a tax system, according to the recent studies?

5. What types of Budget Classification are used by economists?

6. Why is multiyear budgeting practised in some countries?

7. Why have fiscal problems exacerbated in countries in transition?

8. What is macroeconomics concerned with?

In order to get prepared for participation in the discussion of the questions, write a short essay on the following:

a) Your understanding of fiscal federalism.

(Use: levels of government, taxation, revenue-raising powers, control over expenditure, autonomy of local government)

b) What is the federal government responsible for?

(Use: defence, law enforcement, universities, national parks, road construction)

c) What are the regional and local governments responsible for?

(Use: construction, local environmental issues, local enterprises, cultural institutions)

Ex. 15. Prepare a short talk on the following:

a) Changes in Russian fiscal picture accompanying the structural transformation of the Russian economy since 1992.

b) What do you think of the efficiency of fiscal management in Russia? A large share of government revenues and expenditures are not included in the budget, which violates the integrality and universality principles of government finance. Say what you think of extrabudgetary funds.

c) What is your idea of an effective fiscal policy?

d) How should intergovernmental fiscal relations in Russia be developing? How can they be streamlined?

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