Fundamentals of Macroeconomics

Free Essay Sample «Fundamentals of Macroeconomics»

Introduction

In explaining the association of the three macroeconomic variables, there is a need to give theoretical foundations of the variables. In a three-sector closed economy, there are only three players involved in the exchange of goods and services. The first one is a consumer or a household, who supply capital, labor, entrepreneurial talent, and land. The second player in the aforementioned economic structure is a producer or a firm. The firms or businesses combine the factors of production to manufacture goods and services. Firms pay for the factors of production in terms of wages, interest, rent, profits, and salaries. Similarly, consumers use the money that they get from the provisions of factors of production in purchasing goods and services that the firms produce.  In between the interaction of businesses and households, there lies the government as the third player of a three-sector economy. The major role of the government is the creation of a favorable environment for a smooth exchange of goods and services in the economy. In return for its services, the government imposes taxes on both the households and firms to fund the public goods and service such as roads, security, among others (Kennedy, 2010). The paper will elaborate on how purchasing of groceries, massive layoff of employees, and decrease in taxes affect government, households, and businesses.

Discussion of Effects

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Purchasing of groceries increases the overall consumption levels of households. Consumers must pay more to enjoy the new type and quality of utility. Thus, firms or rather businesses will also incease sales of goods and services. Consequently, the businesses are likely to use the increased revenue by investing the money in expanding their production to match the new market demand. In between consumer and producer relationship, the government will also benefit by imposing taxes on purchase and production of groceries and reducing the income of households and businesses. The imposing of taxes by the government is referred to as withdrawal. The government will use the tax revenues to finance various state projects leading to an injection into the economy. Therefore, purchases of groceries would cause a general development of the economy (Mankiv, 2014).

On the other hand, massive layoff of employees leads to a reduction of income of the households. The reduction of inflow in the net income of households due to increased unemployment rates decreases their levels of consumption and inflates dependency ratio exacting more pressure on the working population. Similarly, reducing workforce decreases the production capacity of the firms. In addition, the businesses will have to limit their supply of goods and services in the market. Therefore, they will have to reduce their production levels due to lowered market demand and lay off more workers. The government revenue will also shrink reducing their expenditure in the provision of merit goods and services. Hence, massive layoff of employees leads to contraction of the economy (Dwivedi, 2010).

Decrease in taxes ensures that households have more money at their disposal for expenditure. Instead of spending the increased income, they can decide to save some of it in financial institutions. Firms will also have more money to invest due to the reduction of taxes. Furthermore, the businesses can get access to the savings of households from the financial institutions through borrowing. Thus, organizations will increase their investments in operations and produce more goods and services. Households will also be in a position to buy the increased number of products, since reduction in taxes had increased their demand arising from increased disposable income. On the other hand, government’s revenue will decrease because of the reduced taxes. However, the increased sales of goods and services of companies and high expenditure of consumers may have a net effect of increasing the revenue of the government from tax collections in the long run (Kennedy, 2010).

The most recent and modern global economic event illustrating the theory of macroeconomics was the great recession in 2007-2009.  The financial meltdown culminated to the massive loss of jobs. Consequently, there were drastic decreases in the consumption levels of households. Thus, the government had to stimulate economic growth by increasing their expenditure and instituting massive tax cuts. As a result, the global economy started recovering after the government measures (Mankiv, 2014).  

Conclusion

In conclusion, purchasing of groceries and decrease in taxes may lead to an expansion of the economy. However, massive layoff of employees will have a negative impact on the economic growth of the country. The degree to which the three macroeconomic variables may affect the economy depends entirely on the behaviors of consumers. Hence, there is a need for different governments to determine the effects of various measures in relation to their specific economy.

Free Essay Sample «Fundamentals of Macroeconomics»

 

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