August 7, 2014
Fundamentals of Macroeconomics
Macroeconomics is the study of the economy as a whole. What happens in the economy as a whole is based on individual decisions that are made during economic activities (Colander, 2010). Economic activities can be defined as actions that involve the production, distribution and consumption of goods and services at all levels within a society ("Business Dictionary", 2014). Purchasing of groceries, a massive layoff of employees, and decreases in taxes are just a few economic activities that will be discussed along with the affects those particular activities have on government, households, and businesses. The flow of resources from one entity to another for each activity will be discussed as well. Let us begin with grocery shopping.
Shopping for groceries is something that is done by each and every household. We all must eat to survive. The amount a household purchases depends on the prices of the products and how much money they have set aside for their grocery budget. Product prices are driven by the state of the economy. Consumers will shop around to find the “best deal” to stretch their budget as far as they can, especially if the economy is in a weakened state. Grocers will compete with other stores to try and keep the consumers coming back to their establishments. The more the consumers purchase the more successful the businesses will be. In many cases, lower income families must seek assistance from the government in the form of food stamps and other aid to provide for their families. Families that fall into the lower income bracket often times are due to one or more working adults in the household being laid off by an employer.
Massive layoffs of employees affect all economic institutions. In an unhealthy economy, a single lost job becomes infectious, combining with others and spreading through family, neighborhood and community. Widespread cutbacks in spending by families mean lower demand for businesses and lower tax revenues for the government (Calabresi, 2009). Take the recession that our economy is still trying to climb out of, it started with a few people losing their jobs and an unemployment rate of just over 4.6% in the beginning of 2008 snowballing into an unemployment rate of twice that in the beginning of 2010 (Amadeo, K., 2014). When jobs are scarce, consumers tighten their belts on products and services that are not a necessity. People who have jobs are fearful of losing their jobs and tend to keep their money and only spend on products and services that are “must haves” and not on things that are just “wants”. Spending less means income for all is reduced including the government. Which leads us to decreases in taxes.
The increases and decreases of taxes that the government imposes affects the amount of disposable income a household has. When the government imposes a tax decrease it puts more money in consumer’s pockets and increasing a household’s disposable income. Disposable income is the main factor driving consumer demand, which accounts for two-thirds of total demand ("Info Please", 2014). Households with more disposable income allow consumers to loosen their purse strings if they choose to and spend more money on the economy by purchasing goods and services which increases the income for businesses. So we have different entities from households, to businesses, to the government, spending and receiving income in several ways depending on the economic activity. How does that flow of income work between the different institutions? Does the money flow in only one direction or are their multiple avenues of income flow? To answer that question, one must look at how and who each entity receives their income. One example of the flow of income and expenditure is households. In a very simple economy, called a two-sector economy, households receive income for their work and spend it