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price of goods, services and commodities, it has serious effects for individuals and
businesses.
On a microeconomic level, this has several effects. Businesses are forced to
raise their prices in response to the increased cost of materials. They also need to
pay their employees more over the long term to account for the higher cost of
living.
This is just one example of a macroeconomic phenomenon – in this case,
inflation and a rising cost of living – affecting a microeconomic one. Other
macroeconomic decisions, such as the creation of a minimum wage or tariffs for
certain goods and materials, have significant microeconomic effects.
Do you want to gain a detailed understanding of macroeconomics? Enroll in
our Economics Without Borders course to learn how currencies, central banks and
a wide variety of other factors affect national and global economies.
Microeconomics seeks to solve problems on a small level. Some economics
like to describe microeconomics as the study of economics and behavior from the
bottom up, since it’s focused on the effects of low-level decisions on the economy.
An example of a microeconomic issue could be the effects of raising wages
within a business. If a large business raises its wages by 10 percent across the
board, what is the effect of this policy on the pricing of its products going to be?
Since the cost of producing products has increased, the price of these
products for consumers is likely to follow suit. Likewise, what will happen if a
company raises wages for its most productive employees but fires its least
productive workers?
These are the type of questions microeconomics aims to solve.
Microeconomics is also useful for studying the effects of your own decisions. One
of the most common principles in microeconomics is opportunity cost.
Opportunity cost is the value of making one decision over another. A
decision that involves economy cost is the choice of one meal instead of another:
by choosing a certain food, you miss out on the benefits offered by another.
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Choices involving opportunity cost could relate to your career. By choosing
one job over another, you may gain opportunities but lose others. In addition to
factors like supply and demand, opportunity cost is one of the principles of
microeconomics.
Learn more about opportunity cost, including several examples of the
opportunity cost of career choices and buying decisions, in our blog post on the
opportunity cost formula.
Due to the narrow focus of macroeconomics, it’s an incredibly valuable
skillset for making decisions in your own life. Learn more about intelligent
decision making in our Cognitive Biases: Learn to Master Decision Making
course.
While microeconomics focuses on the effects a certain decision has on
individuals and businesses, macroeconomics looks at the bigger picture. In
macroeconomics, a common issue is the effects of certain policies on the national
or regional economy.
For example, while a microeconomist might study the effects of low interest
rates on individual borrowers, a macroeconomist would observe the effects that
low interest rates have on the national housing market or the unemployment rate.
Another common focus of macroeconomics is the way taxes affect the
economics of a nation. A macroeconomist would look at the effects of a decrease
in income taxes using measures like GDP and national income, rather than
individual factors.
Do you want to learn more about macroeconomics? Discover how interest
rates and trade policy affects the national economy by enrolling in our 21st century
economics course, How The Economy Really Works.
Microeconomics and macroeconomics have a lot in common, and the skills
used to solve small-scale economic issues are often identical to those used to find
solutions to large-scale economic problems.
Learn the impact of economic variables on small firms, individuals,
households and the economy as a whole in our Micro & Macro Economics course.
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Designed for new economics students, this in-depth course is an excellent
introduction to macro and micro economics.
EXERCISES
1. Sum up the main ides of the text and retell it in Russian.
2. Fill in the missing words from the box into the text below.
macroeconomics methods different households services affect resources
attempts standard low price markets dealing country stabilize produces currently
shocks
Microeconomics and 1)_________ are two concepts in economics that are
used to understand, predict and stabilize the economy. This is done to keep the
economy from collapsing and causing financial instability. These 2)_________ are
also used to understand and predict the trends of the economy. Microeconomics
and macroeconomics are often used together and play a huge part in the economy
of a country, but are 3)_________ from each other in many different ways.
Microeconomics is a branch of economics that focuses on studying the
habits and finances of individual 4)_________. Microeconomics is derived from
Greek prefix «micro» meaning «small». Microeconomics focuses on studying the
earning, spending and the behavior of individual households and firms. Generally
this term applies to markets where goods or 5)_________ are bought and sold. The
study of microeconomics determines the decisions of individual households and
firms 6)_________ the supply and demand in the market for goods and services,
along with prices, quality and quantity.
Microeconomics also deals with the effect of government policies and
regulations on the individual households. The Economist's Dictionary of
Economics defines Microeconomics as «The study of economics at the level of
individual consumers, groups of consumers, or firms... The general concern of
microeconomics is the efficient allocation of scarce 7)_________ between
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alternative uses but more specifically it involves the determination of price through
the optimizing behavior of economic agents, with consumers maximizing utility
and firms maximizing profit».
Microeconomics plays a huge part in trying to determine the success and
failure of products by focusing on previous market trends or through market
research. Microeconomics 8)_________ to establish relative prices of goods and
services and allocation of limited resources by analyzing market trends. It also
determines the elasticity of the product. Other factors of microeconomics include
interest rates, inflationary rates, purchasing power and 9)_________ of living. The
supply and demand concept plays a huge part in microeconomics as it directly
affects the purchase of the product. The law of supply and demand suggests more
supply, lower demand, while 10)_________ supply causes higher demand for the
product. This also directly affects the price of the product, as higher the demand,
higher the price, while higher supply results in lower 11)_________.
Microeconomics is considered as «the bottom-up view of the economy», or «how
people deal with money, time, and resources».
Macroeconomics is the branch of economics that deals with economy as a
whole, rather than individual 12)_________. It also includes national, regional and
international economies. Macroeconomics originates from the Greek prefix
«macro» meaning «large». Macroeconomics focuses on the 13)_________ with the
performance, structure, behavior, and decision-making of an economy as a whole.
Macroeconomics requires studying the GDP (Gross Domestic Product),
unemployment rates, and price indices in a country in order to understand how the
economy functions. units behavior national explain unemployment
The Economist's Dictionary of Economics defines Macroeconomics as «The
study of whole economic systems aggregating over the functioning of individual
economic 14)_________. It is primarily concerned with variables which follow
systematic and predictable paths of 15)_________ and can be analyzed
independently of the decisions of the many agents who determine their level. More
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specifically, it is a study of national economies and the determination of
16)_________ income».
In order to analyze macroeconomics, macroeconomists develop different
models in order to 17)_________ the relationship between different factors that
affect the economy of a country. These factors include 18)_________, inflation,
national income, savings, investment, international trade and international finance,
output and consumption. Macroeconomics is considered as the study of the
economy as a whole as well as factors that are national as well as international that
affects the economy of a 19)_________, this could also include government rules
and regulations in addition to foreign direct investment, exports, imports, etc. The
study of macroeconomics is also used to analyze and 20)_________ the economy,
which directly affects the general people and microeconomics.
Three main concepts of macroeconomics that play a huge part include output
and income, unemployment and inflation and deflation. National output is the total
value of everything that a country 21)_________ in a given time period. This
generates income for the country through exports. The amount of unemployment in
a country is determined using the unemployment rate, which is derived from the
amount of people that are not 22)_________ part of the labor force and also
includes people that are looking for work. Inflation and deflation are related to the
value of money. The rise and fall in the value of money determine the currency
value of a country. In order to avoid major economic 23)_________, such as The
Great Depression, governments adjust policies such as fiscal policy and monetary
policy in order to continue maintaining stability and growth of an economy.
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3. Read the following article and make a rendering of it in English.
МАКРОЭКОНОМИКА: ПРЕДМЕТ И МЕТОД
МАКРОЭКОНОМИКИ.
МЕТОД МАКРОЭКОНОМИКИ. АГРЕГИРОВАНИЕ И
АБСТРАГИРОВАНИЕ.
Основой метода макроэкономики является агрегирование, под которым
понимается объединение сходных экономических субъектов и объектов в
максимально большие группы. Так, например, в ходе агрегирования всех
потребителей объединяют в сектор домохозяйств; всех производителей – в
предпринимательский сектор.
Агрегирование объектов экономических отношений приводит
к тому,
что все отдельные блага и средства производства превращаются в единое
благо, выступающее и как предмет потребления, и как средство
производства.
Агрегирование помимо объединения субъектов и объектов в большие
группы означает также суммирование их характеристик. Например,
суммирование стоимости всех товаров, производимых в экономике, дает
Валовый Продукт. А суммирование величин индивидуального
спроса
потребителей и фирм на все блага дает величину Совокупного Спроса.
Для проведения операции агрегирования необходимо абстрагироваться
от различий между экономическими субъектами или объектами, т.е.
отбросить их несущественные с нашей точки зрения характеристики.
Макроэкономика стремится к максимальной степени абстрагирования и
агрегирования. В этом ее преимущество, так как максимальное упрощение
предмета анализа позволяет обнаружить и проанализировать те его свойства,
которые невозможно заметить при большом количестве элементов в
анализируемой системе.
Однако, в максимальной степени абстракции заключается и слабость
макроэкономического подхода. Во-первых, обобщенность предмета анализа
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неизбежно приводит к тому, что полученные результаты и даваемые
рекомендации будут иметь общий характер. Во-вторых, вполне может
оказаться, что при абстрагировании мы отбросили некоторые важные
признаки различных субъектов и объектов экономики, без учета которых
невозможна полнота анализа и соответствие получаемых результатов
реальному положению вещей в экономике.
Part 3
WHAT MACROECONOMIC PROBLEMS DO POLICY MAKERS MOST
COMMONLY FACE?
Macroeconomics addresses large-scale economic factors that affect the
overall population. Policymakers therefore have to make macroeconomic decisions
such as setting interest rates and balancing a country's inflation with both its trade
and the foreign exchange rate. Establishing financial conditions that facilitate an
increase in private sector investment also helps policymakers to increase economic
growth while reducing poverty. Policymakers have to take numerous factors into
account when tackling wide problems such as unemployment, inflation and a
country's current gross domestic product (GDP).
Philosophies on how to accomplish growth and a healthy economy vary.
Keynesian economic policies recommend that a government run a budget surplus
during times of financial prosperity and a deficit during recession. Classical
economic policies take a more hands-off approach during a recession, believing
that the markets correct themselves when left unimpeded and that excessive
government borrowing or intervention negatively affects market potential for
recovery. Policymakers therefore have to reach some agreement or settlement with
one another on what approaches to take at any given time.
The use of taxation as a macroeconomic tool is a hotly debated topic
amongst policymakers, since tax rates have a large affect on overall financial
conditions and the government's ability to balance a budget. Supply-side economic
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theories, essentially the opposite of Keynesian theories, argue that higher taxes
pose a barrier to private investment, and therefore hinder the growth that is
essential to a healthy economy. However, lower taxes mean that the government
has less money to spend, which potentially increases the deficit due to more
government borrowing.
This was seen during the early 1980s when Ronald Reagan cut taxes and
increased military spending as a means of stimulating the economy. As a result, the
government was required to run a deficit to accommodate the increased spending
with less revenue.
Policymakers always want to avoid a depression, which occurs when there
has been a severe recession for over two years. A depression typically brings with
it increased unemployment, increased poverty, reduced credit, a shrinking GDP
and overall economic volatility. Reduced investor confidence makes it increasingly
difficult to get capital back into the economy to restimulate growth. Policy changes
are often needed in this instance to stabilize the economy and reverse the effects of
the prolonged recession.
A famous example is the Great Depression of 1929 in the United States. As
a result of the stock market crash and resulting fallout, Franklin D. Roosevelt and
other policymakers created the Federal Deposit Insurance Corporation (FDIC) and
the Securities and Exchange Commission (SEC) to protect banking deposits and
regulate stock market trading. Government spending also increased as World War
II began, and these changing conditions helped reverse the depression economics
of the previous years.
Policymakers have a difficult job when it comes to macroeconomics.
Economic factors are interrelated in so many ways that a change in one factor can
have unintended consequences on multiple others. Policymakers therefore have to
maintain a fairly delicate balancing act while trying to tip the scales toward
economic growth in ways that do not increase overall economic volatility.
The United States is on a glide path to fiscal disaster, with experts projecting
that the federal government will take in far less money than it spends–indefinitely.
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Although in our experience business leaders have a general sense that this state of
affairs is dangerous, they’re unclear on exactly how fiscal policy shapes the
competitiveness of the nation and of their companies. The current policy is eroding
competitiveness in several ways, and business conditions in the United States will
deteriorate if there’s no change in direction. A better understanding of how fiscal
policy and competitiveness are linked may make such a change more likely.
How does fiscal policy affect competitiveness? To answer, we need a clear
definition of «competitiveness» – which is, in our view, the extent to which a
nation’s companies can succeed in the global marketplace while its people enjoy a
high and rising standard of living. Companies compete on the basis of production
costs for a certain amount of output. The only way to lower those costs while
sustaining and raising workers’ standard of living is to increase productivity, or
output per worker.
Raising productivity requires improving human capital, increasing physical
capital (equipment or software, for example), or using these forms of capital more
efficiently. Let’s look at how the spending side of fiscal policy relates to these
three drivers. Many public goods provided by the government contribute directly
to one or more of them. Spending to improve public education, for instance, can
increase human capital. Spending on infrastructure can increase physical capital.
Publicly funded R&D, effective regulation, and incentives for private-sector
innovation can lead to a more efficient use of human and physical capital. In
contrast, some spending, like that for health care and other entitlements, does little
to directly enhance competitiveness.
The tax side of fiscal policy also has the potential to support or hinder
competitiveness. Revenues are required to fund public goods, so taxes are essential
to competitiveness. At the same time, by reducing the returns on investment and
hard work, taxes can distort the allocation and use of both human capital and
physical capital. Some taxes are much better than others.
Finally, when the government runs a deficit, it competes for funds that could
be invested in the private-sector capital stock, putting upward pressure on the cost
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of borrowing for companies. This effect is especially severe when government
deficits accumulate in a large debt and lenders demand substantially higher returns.
When the U.S. government runs a large deficit, as it often has in recent
decades, it competes for investment dollars, driving up companies’ borrowing
costs. Our plan calls for shrinking the deficit to just over 1% of GDP.
Current U.S. fiscal policy is deeply worrisome on all three dimensions. The
evidence suggests that we are not investing enough in the public goods–primarily
infrastructure and education–that are vital for competitiveness. Indeed, some
presidential candidates have recommended the elimination of entire federal
departments, including Commerce, Education, and Energy, whose activities
directly support the nation’s productivity. Worse, projections based on current
policy show a dramatic shift away from investment in public goods and toward
entitlements, especially Medicare. The dysfunction of the corporate tax code
(which levies high rates but raises little revenue), the persistence of the mortgage-
interest deduction (which steers funds into housing and away from more-
productive investment), and the absence of a value-added tax, or VAT (used in
most advanced countries to bring in revenue without discouraging saving or
investment), mean that we raise funds for public goods in unnecessarily
distortionary ways. Recent U.S. deficits are understandable given the Great
Recession, but long-term projections depict an accumulation of debt that would
devastate investment in both public goods and private capital.
These policy failings are evident in a statistic often cited in discussions of
U.S. competitiveness: our large current account deficit, which includes the trade
deficit. Some analysts have argued that the current account deficit doesn’t
represent a problem for U.S. competitiveness because it is the flip side of a capital
account surplus–implying that the United States must be an attractive destination
for investment. It has become clear, though, that reduced saving, not increased
investment, explains the rising U.S. capital account surplus. The drop in domestic
saving in the U.S. from 1980 to 2007 is almost identical to the increase in the
current account deficit (5% of GDP) over the same period, while nonhousing
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