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Major Macroeconomic Issues

Macroeconomic seeks to analyze those problems that affect eh economy as a whole; such problems cannot be adequately studied with reference to an individual product, firm or industry. For example, the effect of introduction of new technology (say computers) is not limited to a single product or industry also, it will affect the structure of economic activity in the economy as a whole; it will affect the rate of economic growth; it will affect the level of employment (or unemployment); it will affect the general price level; it will affect the country’s balance of payments, etc. All those problems and issues that affect the economy as a whole are studied in macroeconomics.

We present a brief view of the major macroeconomic issues as follows:

Economic Growth

Although traditionally macroeconomics has focused on output gap and has sought to explain the factors that cause divergence between potential GDP and actual GDP (i.e.  GDP gap), in more recent times, macroeconomics has also sought to identify the forces that help an economy raise the level of potential output. Increase in the level of potential output constitutes economies growth, and forms an important issue in macroeconomics.

Business Cycles

Macroeconomic activity, in the long history of nations, has never followed a smooth trend; economic activity faces uptrends and downtrends, almost in a cyclical regularity.

These cyclical uptrends and downtrends are known as business cycles. The various phases of a business cycle are identified as (1) boom, (2) recession, (3) depression,  and (4) slump.

The various phases have been illustrated in. AB lime shows the normal trend line. A movement from A to C takes the economy away from its normal trend. This constitutes boom. When recession sets in, economy moves down-hill (from C to D); if the downtrend is not arrested, economy may get caught in slump (or what is also called depression). E to F represents the recovery phase.

This cyclical behavior of economic activity has always attracted the attention of practitioners of macroeconomics. As a matter of fact, it was the great depression of 1930s that gave birth to modern macroeconomics, in a form that came to be known the Keynesian Revolution.


Inflation can be defined as a sustained rise in the general price level. It has been the experience the world over that a rise in GDP has generally been accompanied by an increase in the general price level. Normally, a moderate inflation has been consider  a necessary condition of economic growth. But frequently rising general price level went out of control and reached astonishing limits. The phenomenon of inflation (and its converse deflation) is conventionally analyzed in macroeconomics.


Another experience common to most of the economies in the world, developed and developing alike, has been that the rate of creation of new job opportunities has lagged behind the demand for jobs. As a result, apart of the labour force remains unemployed. This non-utilization of available resources in the economy represents a deadweight loss. Macroeconomics ahs been trying to seek a lasting solution to this perennial problem.

Government Budget Deficits

Government has been traditionally spending more than what they could earn by way of taxes and sale of economic goods and services produced by them. The resultant deficit (variously known as budget deficit or fiscal deficit) could be financed by mobilization of capital by way of loans. An excess of government expenditure over revenue enabled it to create more jobs and thereby help the economy generate more income. But this way of financing government expenditure has many other implications, many of these may prove adverse: (i) budget deficit may prove inflationary, especially if the economy fails to generate more output; (ii) a large part of domestic savings may be cornered by the government; adequate savings may not be available for private investment; and (iii) this may put pressures on market rates of interest. Macroeconomics has been paying more attention to these issues in recent years.

Interest Rates

In the globalizing world of today, interest rates have come to occupy centre stage. Globalization implies cut-throat competition. Successful globalization requires that all the actors work to their best efficiency; none of them would like to be competed out because they have to pay high rates of interest. Therefore, how to keep interest rates low is the issue that has attracted the attention of economists.

Balance of Payments

Again, in the globalizing, increasingly free market economies, goods, services and capital are flowing across national borders as never before. The cross-border transactions in goods, services and capital given rise to payments and receipts in foreign exchange. Exchange rates, wherever they are left to be determined by market forces, exert their own influence on international economic reactions. Therefore, a proper analysis of balance of payments has been a core issue in macroeconomics.

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