In a class of economists, the topic of discussion was the falling interest rates. All the participators had different views and possible reasons for the falling rates. While most of them were bothered about the effect of these low interest rates on the borrowers, there was one economist who had gone deeper and wanted to observe the effect that these low interest rates would have on the housing market as a whole at the national level. It is thus understood that when the whole clan is concerned with micro economics, the one economist is trying to look at things from macro economics’ perspective. This is a small example that marks the difference between microeconomics and macroeconomics.
What is macroeconomics?
Macroeconomics is a field of economics that portrays a larger picture. It concerns itself with the economy at a large scale. Various issues of an economy are looked at. The problems faced by an economy and the progress that it makes are measured and captured as a part of macroeconomics. When one talks of the problems that an economy faces unemployment, increasing tax burden, inflation etc. are all considered. This makes it evident that macroeconomics looks at huge numbers. It studies the relation between various nations regarding how the policies of one nation has an effect on the other. It encompasses within its scope, examining the success and failure of government policies. This discussion gives rise to various types of economies based on which the countries are classified.
The Capitalist country
A capitalist country is characterised by decentralised and voluntary decisions for economic planning instead of the centralised political methods. Here are a few features of a capitalist economy that would give a better insight into the topic.
Features of a capitalist country:
- Freedom of consumers to choose between goods and services.
- Freedom of individuals to set up business to supply goods and services.
- There is limited intervention of the government.
- Market forces regulate the allocation of goods.
- The labour markets are flexible.
Profits are earned in this economy by efficient usage of capital goods. Efficiency is proved by profits earned. In other words, when inputs are transformed into more valuable outputs, profits are earned. If we look away from the greener side of a capitalist economy, we can understand the one main disadvantage that this kind of an economic structure could face is the creeping in of monopoly.
The entrepreneurs of a capitalist economy act as coordinators. They help divert the resources towards profitable ventures. It is through this resource allocation and utilisation that the capital formation takes place. An entrepreneur is one who assumes all the risks and rewards of a business venture of which he is the founder.
Investment expenditure
As the name suggests it is the money spent towards expenses to create investments. To put it in other way, it is the money that the households and firms spend on capital goods. One important point worth mention is that this expenditure lacks a profit motive. It plays a pivotal role in macroeconomic activity for business cycles and economic growth in the long run.
In short, investment expenditure is capable of creating further income and promotes employment in a country.
The following are a few types of investment expenditure:
- Autonomous investment
- Financial investment
- Real investment
- Gross investment
- Net investment
Now that you are familiar with investment expenditure, learn what is invested and how is this investment made. Let’s understand the concept of revenue.
Revenue
Revenue is the total earnings of a business through sale of products and rendering of its services to consumers. Revenue could be operating or non-operating. The importance of revenue and its recognitions is better understood if we are aware of the factors that are considered while determining GDP. The indicator of economic health of a country is measured through the GDP (gross domestic product). So, GDP of a country speaks a lot about the country. Do understand that GDP is the productivity of the economy and not of the government.
How are investment expenditure and revenue related?
A householder earns income by selling factor services through resource markets. This income is spent towards purchase of goods through product markets.
The business sector generates revenue through selling goods in product markets and uses this revenue to pay for services obtained through resource market.
Thus the business sector through its entrepreneurs invests its revenue in the form of investment expenditure to purchase a portion of gross domestic product.
As an entrepreneur, one performs the following activities:
- Creates a business plan
- Hires labour
- Acquires resources
- Obtains finance
Of the above mentioned activities, go a little deeper into the hiring labour aspect. Labour is hired for wages. The labour so hired is called wage labour and the reward paid to the labour for the work performed is called wage rate. According to the classical economists, the price of labour is determined by the supply and demand of labour. A situation where the available labour willing to work at or below the prevailing wage rate cannot find employment results in unemployment. Of the lot many problems that an economy deals with or faces at a macro level, one prominent problem many face is this unemployment issue. It is one of the most important statistic used to measure the health of a nation.
The great depression
Talking about unemployment, one cannot get away without learning about the Great Depression. It is the period after 1929 in the U.S. when millions of people have become unemployed and lost their jobs. The stock market crash in October 1929 paved way to the Great Depression. However, it is only one of the many causes. The weak banking system couple with industrial overproduction and collapse in the farm-prices have all resulted in the shrinkage of international trade. As a result the global economies were adversely affected. This was not limited only to the U.S. but had also spread to Europe and also the countries all around the world could experience the effects of the Great Depression.
One should understand that macroeconomics has become the most powerful part of economics. To understand global economics and the relationships between various economies, grab more knowledge about macroeconomics guys! Happy reading.
