Fundamentals of Business

9.1 Economic Environment

Macroeconomics is concerned primarily with the forecasting of national income, through the analysis of major economic factors that show predictable patterns and trends, and of their influence on one another. These factors include level of employment/unemployment, gross national product (GNP), balance of payments position, and prices (deflation or inflation).

Macroeconomics also covers role of fiscal and monetary policies policies, economic growth growth, and determination of consumption and investment levels.

There are two areas of research that are emblematic of the discipline: The attempt to understand the causes and consequences of short run fluctuations in national income (the business cycle cycle) the fluctuations of economic activity. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession) and the attempt to understand the determinants of long run economic growth (increases in national income). Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.

Macroeconomic Policies

In order to try to avoid major economic shocks, such as great depression, governments make adjustments through policy changes which they hope will succeed in stabilizing the economy. Governments believe that the success of these adjustments is necessary to maintain stability and continue growth. This economic management is achieved through two types of strategies.

Fiscal Policy
Government's revenue (taxation) and spending policy designed to
(1) counter economic cycles in order
to achieve lower unemployment,
(2) achieve low or no inflation, and
(3) achieve sustained but controllable economic growth.

In a recession, governments stimulate the economy with deficit spending (expenditure exceeds revenue). During period of expansion, they restrain a fast-growing economy with higher taxes and aim for a surplus (revenue exceeds expenditure). Fiscal policies are based on the concepts of the UK economist John Maynard Keynes (1883-1946), and work independent of monetary policy which tries to achieve the same objectives by controlling the money supply.

Fiscal policy is described as being neutral, expansionary, or contractionary. An expansionary fiscal policy occurs when the government lowers taxes and/or increases spending; thus expanding output (national income). An increase in government spending or a cut in taxes shifts the aggregate demand curve to the right. An expansionary fiscal policy will expand the economy's growth. A contractionary fiscal policy occurs when the government raises taxes and/or lowers spending; thus lowering output (national income). A decrease in government purchases or an increase in taxes shifts the aggregate demand curve to the left. A contractionary fiscal policy will constrict the economy's overall growth.