MACROECONOMIC GOALS:

Three conditions of the mixed economy that are most important for macroeconomics, including full
employment, stability, and economic growth, that are generally desired by society and pursued by
governments through economic policies.
Macroeconomic goals are three of the five economic goals of a mixed economy that are most
important to the study of macroeconomics. They are full employment, stability, and economic growth.
Full Employment
Full employment is achieved when all available resources (labor, capital, land, and entrepreneurship)
are used to produce goods and services. This goal is commonly indicated by the employment of labor
resources (measured by the unemployment rate). However, all resources in the economy--labor,
capital, land, and entrepreneurship--are important to this goal. The economy benefits from full
employment because resources produce the goods that satisfy the wants and needs that lessens the
scarcity problem. If the resources are not employed, then they are not producing and satisfaction is
not achieved.
Stability
Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices.
Stability seeks to avoid the recessionary declines and inflationary expansions of business cycles. This
goal is indicated by month-to-month and year-to-year changes in various economic measures, such as
the inflation rate, the unemployment rate, and the growth rate of production. If these remain
unchanged, then stability is at hand. Maintaining stability is beneficial because it means uncertainty
and disruptions in the economy are avoided. It means consumers and businesses can safely pursue
long-term consumption and production plans. Policies makers are usually most concerned with price
stability and the inflation rate.
Economic Growth
Economic growth is achieved by increasing the economy's ability to produce goods and services. This
goal is best indicated by measuring the growth rate of production. If the economy produces more
goods this year than last, then it is growing. Economic growth is also indicated by increases in the
quantities of the resources--labor, capital, land, and entrepreneurship--used to produce goods. With
economic growth, society gets more goods that can be used to satisfy more wants and needs--people
are better off; living standards rise; and scarcity is less of a problem.
Tradeoffs
The three macroeconomic goals of full employment, stability, and economic growth are widely
considered to be beneficial and worth pursuing. Each goal, achieved by itself, improves the overall
well-being of society. Greater employment is typically better than less. Stable prices are better than
inflation. Economic growth is better than stagnation.
However, the pursuit of one goal often restricts attainment of others. For example, policies that
promote economic growth might create unemployment or policies that improve stability might limit
economic growth. Macroeconomic goals are also often in conflict with the microeconomic goals of
efficiency and equity.

Consider a few hypothetical situations, depicted by the hypothetical Republic of Northwest

Queoldiolia, in which the pursuit of one goal limits achieving another goal.
Full Employment and Stability: The Central Bank of Northwest Queoldiolia seeks to promote lower
rates of unemployment through expansionary monetary policy. The economy expands,
unemployment falls, and full employment is achieved, but inflation emerges from the over stimulated
economy.

Economic Growth and Full Employment: Seeking to keep pace with economic growth in neighboring
Southeast Queoldiolia, the President of Northwest Queoldiolia enacts an intense program of scientific
research and development. The program bears ample fruit, creating scores of new technological
innovations that lead to high rates of economic growth, but implementation of the innovations
disrupts the economy throwing millions of people who lack the necessary skills or training needed by
the new technologies out of work.

Policies and Politics

The pursuit of these three macroeconomic goals is inherently an act of normative economics. In fact,
the "norm" part of term normative economics is synonymous with the word "goal." Normative
economics is essential to the pursuit of economic goals.
In a mixed economy, the pursuit of these goals is largely directed by governments. This, of course,
brings into play the wonderful world of politics and never-ending debates over which of these three
macroeconomic goals is most worth pursuing with economic policies.

As the discussion turns to politics and policies, two viewpoints tend to emerge--liberal and
conservative. Generalities are, of course, fraught with exceptions. However, with that caution in mind,
note that each of the two political views have historically placed greater emphasis on the attainment
of some goals over others.

Liberals have tended to seek full employment over stability and economic growth. Conservatives, in
contrast, have sought economic growth and stability, especially price stability, more so than full
employment.

MACROECONOMIC MARKETS:

Three sets of markets that make up the macroeconomy--product, financial, and resource--which
exchange the three primary types of macroeconomic commodities--gross production, legal claims, and
factor services. The four macroeconomic sectors--household, business, government, and foreign--
interact through these three sets of markets. The primary objective of macroeconomic theories is to
explain activity that takes place in these three sets of markets.
The three groups of macroeconomic markets that form the foundation of macroeconomy are the
product markets, the financial markets, and the resource markets. Each set of markets exchange a
different type of commodity important to the economy. The product markets exchange final goods
and services, or gross domestic product. The financial markets exchange legal claims, or financial
instruments. The resource markets exchange factor services, or the services of the four factors of
production--labor, capital, land, and entrepreneurship.
What They Are
Each of the three groups of macroeconomic markets are commonly aggregated into theoretical
constructs that combine the activity in hundreds of thousands of individual microeconomic markets.
These three aggregated macroeconomic markets are characterized by the basic types of commodities
exchanged.Product Markets: The product markets, also termed goods or output markets, exchange
the production of final goods and services, what is formally termed gross domestic product. The
buyers of this production are the four macroeconomic sectors--household, business, government, and
foreign. The seller of this production is primarily the business sector. A substantial part of
macroeconomics is devoted to explaining how and why gross domestic product exchanged through
the product markets rises or falls. When Duncan Thurly purchases a Deluxe Club Sandwich from
Manny Mustard's House of Sandwich, he is operating through the product market.

Financial Markets: The commodity exchanged through financial markets is legal claims. Legal claims,
or financial instruments, represent ownership of physical assets (capital and other goods). Because the
exchange of legal claims involves the counter flow of income, those seeking to save income buy legal
claims and those wanting to borrow income sell legal claims. When Winston Smythe Kennsington III
buys a few hundred shares of OmniConglomerate, Inc. corporate stock, then he is operating in the
financial markets.

Resource Markets: The services of the four factors of production--labor, capital, land, and
entrepreneurship--are traded through resource markets. Resource markets, also termed factor
markets, are used by the business sector to acquire the factor services needed for production.
Payment for these factor services then generate income received by the household sector, which owns
the resources. When Pollyanna Pumpernickel takes a job working at the Wacky Willy factory
assembling Wacky Willy Stuffed Amigos, then she is participating in the resource markets. Note only
factor services are exchanged through factor markets, not the actual factors.

Buyers and Sellers

The four macroeconomic sectors take part in each of the three sets of markets in various ways.
Consider which sectors are the primary buyers and sellers for each market.Household Sector: The
household sector is the primary participant on the buying side of the product markets. This sector
regularly purchases almost two-thirds of all gross domestic product exchanged through the product
markets. This sector, in that it owns all resources, is also on the selling side of the resource markets. In
fact, the income that it uses to purchase gross domestic product comes from selling factor services
through the resource markets. Lastly, the household sector is on the buying side of the financial
markets. When it buys legal claims, it is lending (or saving) income.

Business Sector: The business sector is THE primary participant on the selling side of the product
markets. This is the sector responsible for production. However, it also purchases capital goods
through the product markets, meaning it operates on both the selling side and the buying side. This
sector is also on the buying side of the resource markets. It acquires the factor services used for
production from the household sector through the resource markets. Lastly, the business sector is
largely on the selling side of the financial markets. When it sells legal claims, it is borrowing income
that is more often than not used to purchase capital goods.

Government Sector: The government sector participants on the buying side of the product markets
along with the household and business sector. The government acquires a portion of gross domestic
product in the course of pursuing its designated functions. This sector also surfaces on the selling side
of the financial markets. If often sells legal claims to raise funds needed to pay for the purchase of
gross domestic product.

Foreign Sector: The foreign sector participants in the product markets, on both the buying side and
the selling side. When goods are exported from the domestic economy, the foreign sector is on the
buying side of the product markets. When goods are imported into the domestic economy, the foreign
sector is on the selling side of the product markets.

A Circular Flow of Activity

The Circular Flow

Circular Flow
The product, financial, and
resource markets
represent conduits of
exchange activity among
the household, business,
government, and foreign
sectors. In other words,
commodities flow through
these markets from sector
to sector in a continuous,
circular fashion. A
standard circular flow
model is presented in the exhibit to the right.Household Income: The income received by the
household sector at the far left is generated by selling factor services to the business sector. This
income is then used to purchase goods produced by the business sector.

Business Revenue: The revenue received by the business sector at the far right is generated by selling
production to the other sectors, especially the household sector. This revenue is then used to buy the
factor services supplied by the household sector.

Government Taxes, Borrowing, and Spending: The tax revenue collected by the government sector in
the center of the exhibit from the household sector is used to purchase output from the business
sector through the product markets. The government sector also pays for a portion of these purchases
with household sector saving that is borrowed through the financial markets. The resulting business
sector revenue is then used to pay for factor services which becomes income that the household
sector uses for taxes and saving.

Foreign Exports and Imports: The imports sold by the foreign sector at the very top to the domestic
economy generates revenue that is often used to purchase exports from the domestic economy.
Around and around and around it goes. Activity flows from sector to sector through each of the three
markets.

MACROECONOMIC PROBLEMS:

Undesirable situations that exist in the macroeconomy, largely because one or more of the
macroeconomic goals are not satisfactorily attained. The primary problems are unemployment,
inflation, and stagnant growth. Macroeconomic theories are designed to explain why these problems
emerge and to recommend corrective policies.
Macroeconomic problems arise when the macroeconomy does not satisfactorily achieve the goals of
full employment, stability, and economic growth. Unemployment results when the goal of full
employment is not achieved. Inflation exists when the economy falls short of the stability goal. These
problems are caused by too little or too much demand for gross production. Unemployment results
from too little demand and inflation emerges with too much demand. Stagnant growth means the
economy is not adequately attaining the economic growth goal. Each of these situations is
problematic because society is less well off than it would be by reaching the goals.
Unemployment
Unemployment arises when factors of production that are willing and able to produce goods and
services are not actively engaged in production. Unemployment means the economy is not attaining
the macroeconomic goal of full employment.
While attention is usually focused on the unemployment of labor, such as the time Pollyanna
Pumpernickel was laid off from her job at the OmniMotors Car Company, any of the four factors of
production can suffer unemployment. For example, The Wacky Willy Company might be operating one
of its Stuffed Amigos factories at half capacity or Herb Haberstone might leave a section of his
farmland uncultivated.

Unemployment is a problem because:

Less output is produced and thus the economy is less able to address the scarcity problem.

The owners of unemployed resources receive less income and thus have lower living standards.

Inflation
Inflation arises when the average price level in the economy consistently and persistently increases. In
other words, prices generally rise from month to month and year to year. With inflation the economy
is not attaining the stability goal.
Inflation is an average increase in prices, with some prices rising more than the average, some rising
less, and some even declining. As such, not every member of society is likely to experience exactly the
same inflation.

Inflation is a problem because:

The purchasing power of financial assets such as money declines, which reduces financial wealth and
lowers living standards.

Greater uncertainty surrounds long-run planning, especially the purchase of durable goods and
capital goods.

Income and wealth can be haphazardly redistributed among sectors of the economy and among
resource owners.

The Business Cycle

Unemployment and inflation tend to vary with business-cycle instability. At some times,
unemployment is less of a problem and inflation is more. At other times, unemployment is more of a
problem and inflation is less. Consider how these two problems connect to the two primary phases of
the business cycle.Contraction: The contraction phase of a business cycle is characterized by a
general decline in economic activity. Aggregate demand is less, meaning less output is produced, and
thus fewer resources are employed. For this reason, unemployment tends to be a key problem.
However, because markets are more likely to have surpluses than shortages, inflation tends to be less
of a problem.

Expansion: The expansion phase of a business cycle is characterized by a general rise in economic
activity. Aggregate demand is higher, production is greater, and more resources are employed.
Demand for production often outpaces the ability to supply the production. Under these
circumstances, because markets are more likely to have shortages than surpluses, inflation tends to be
the primary problem. However, with robust production and jobs aplenty, unemployment tends to be
less of a problem.

Stagnant Growth
The third problem of stagnant growth arises because the supply of aggregate production is not
increasing at a desired pace or is even declining. An increase in the total production of goods and
services is generally needed to keep pace with an increase in the population of society and
expectations of a rising living standard. Stagnant growth exists if total production does not keep pace.
This means the macroeconomic goal of economic growth is not attained.
Reasons for stagnant growth can be identified with a closer look at the quantity and quality of the
resources used for production.
Quantity: The available quantities of the four factors of production--labor, capital, land, and
entrepreneurship--can restrict the growth of production.
The quantity of labor is based on both the overall population and the portion of the population willing
and able to work. Should either decline, then growth is not likely to keep pace with expectations. If,
for example, Edgar Millbottom decides to quit his job and spend his time doing nothing but vegetating
on his parents living room sofa, then the total quantity of labor declines.

The quantity of capital depends on the amount of investment expenditures relative to the
depreciation of the existing capital stock. If investment expenditures should decline or depreciation
increase, then the economy is less likely to grow. If, for example, restrictive government regulations
and high taxes discourage The Wacky Willy Company and similar manufacturing companies from
building new factories, then the total quantity of capital declines.

Quality: The quality of the four resources can also lead to stagnant growth. The two most noted
resource quality influences are technology and education. The lack of technological progress, which
could result from allocating fewer resources to scientific research can limit increases in the quantity of
resources. Along a similar line of reasoning, allocating fewer resources to education can also limit
resource quality.

MACROECONOMIC SECTORS:

The four aggregate sectors of the macroeconomy--household, business, government, and foreign--that
reflect four key macroeconomic functions and are responsible for four expenditures on gross domestic
product. These four sectors are the primary "actors" on the macroeconomic stage. Macroeconomic
theories then explain macroeconomic phenomena by exploring the interaction among these four
sectors.
The four aggregate macroeconomic sectors that form the foundation for macroeconomic analysis are
the household sector, the business sector, the government sector, and the foreign sector.
Each sector is responsible for a different expenditure on gross domestic product: consumption
expenditures by the household sector, investment expenditures by the business sector, government
purchases by the government sector, and net exports by the foreign sector.
Each sector also has a unique role to play in macroeconomic activity: consumption by the household
sector, production by the business sector, regulation by the government sector, and external activity
by the foreign sector.

What They Are

The four macroeconomic sectors are often delineated by who or what is included. Consider each
sector.Household Sector: This sector includes the entire, wants-and-needs-satisfying, eating,
breathing, consuming population of the economy. In a word, it includes everyone, all consumers, all
people, and every member of society. Pollyanna Pumpernickel, a hardworking mother of two, is a
representative member of the household sector. So too is Winston Smythe Kennsington III, an affluent
corporate executive.

Business Sector: This sector contains the private, profit-seeking firms in the economy that combine
scarce resources into the production of wants-and-needs satisfying goods and services. It includes
proprietorships, partnerships, and corporations. OmniConglomerate, Inc., a multi-billion dollar, multi-
national, mega corporation, exemplifies a member of the business sector. However, Manny Mustard, a
proprietor who owns and operates a little sandwich shop is also part of the business sector.

Government Sector: This sector includes all government entities that impose resource allocation
decisions, that might not be made otherwise, on the rest of the economy. It consists of the three
primary levels of federal, state, and local government responsible for passing and enforcing laws. Of
course, all branches and agencies of the U.S. Federal Government--Congress, Department of
Transportation, Environmental Protection Agency, etc.--is part of the government sector. So too is the
Shady Valley City Council and the local Shady Valley Board of Education included in the government
sector.

Foreign Sector: This sector is comprised of everyone and everything outside the political boundaries
of the domestic economy. It includes households, businesses, and governments in other countries.
The foreign sector of the domestic United States economy includes the governments of other nations
such as the Republic of Northwest Queoldiolia. It also includes citizens and businesses in other
nations, such as Horst Duncanstein, a citizen of Northwest Queoldiolia, and Quedoldiolian Sundial
Company, also located in Northwest Queoldiolia.

What They Do: Macroeconomic Functions

Each of the four sectors has a distinct functional role to play in the macroeconomy. Consumption:
The primary macroeconomic function of the household sector is the consumption of goods and
services that satisfy wants and needs. Promoting consumption by members of the household sector is,
in essence, the ultimate objective of economic activity. Consumption occurs if Pollyanna Pumpernickel
enjoys a slice of pecan pie.

Production: The business sector exists to combine the resources used for the production of the
goods that satisfy wants and needs of the household sector. If not for the productive efforts of the
business sector, consumption would be less satisfying. Production is illustrated by the creation of a
Deluxe Club Sandwich by Manny Mustard's House of Sandwich.

Regulation: The macroeconomic function performed by the government sector is regulation. The
government sector establishes the "rules of the game" and otherwise regulates resource allocation
decisions of the other sectors. If the Shady Valley City Council imposes a tax on the sale jogging shoes,
then the government sector is engaging in regulation.

External: The foreign sector is responsible for any and all economic activity that transpires beyond
the political boundaries of the domestic macroeconomy. It is responsible for all external activity. The
sale of Queoldiolian sundials, imported from Northwest Queoldiolia, provides an example of external
activity originating in the foreign sector.

What They Buy: Aggregate Expenditures

Gross domestic product, the total output produced by the domestic economy, is divided among the
four macroeconomic sectors. Consumption Expenditures: Expenditures on gross domestic product
made by the household sector are consumption expenditures. These expenditures generally reflect
the basic macroeconomic activity of consumption, but the two terms are not necessarily identical.
That is, the satisfaction of wants and needs can occur without an expenditure (such as enjoying a
scenic sunset) and expenditures can be made that do not result in the satisfaction of wants and needs
(such as ice cream that melts before eaten). The purchase of a slice of pecan pie by Pollyanna
Pumpernickel illustrates a consumption expenditure.

Investment Expenditures: The portion of gross domestic product purchased by the business sector is
investment expenditures for capital goods. Although the business sector "buys" a lot of things,
investment expenditures include only those expenditures that acquire capital goods. The purchase of
raw materials or intermediate goods is not part of investment expenditures. The business sector
purchases capital goods to facilitate the production of other goods. A prime example of investment
expenditures is the purchase of a newly constructed factory by OmniConglomerate, Inc.

Government Purchases: The government sector purchases a portion of gross domestic product to
perform its assorted government functions. Included in these purchases is such production as military
equipment, office supplies, highway construction, and the services of employees. The government
sector purchases this production to undertake regulation and to provide public goods. When the
Shady Valley City Council authorizes the purchase of paper clips and office supplies, then government
purchases have occurred.

Net Exports: The expenditure on gross domestic product attributable to the foreign sector is net
exports. Net exports are the difference between exports, goods produced by the domestic economy
and purchased by the foreign sector, and imports, goods produced by the foreign sector and
purchased by the domestic economy. Imports are subtracted from exports to adjust for imported
goods included under the other three expenditure categories. The sale of domestically produced
Wacky Willy Stuffed Amigos to someone living in Northwest Queoldiolia is an example of an export.
The purchase by a resident of Shady Valley of Queoldiolian sundials produced in Northwest
Queoldiolia is an example of an import.

All for One

While each of the four sectors plays a key role in the macroeconomy, a strong case can be made that
the household sector rises head and shoulders above the others.First, the household sector includes
all of the consumption-seeking members of society--the entire population. It IS society. In effect, the
economy exists to satisfy the wants and needs of the household sector.

Second, the household sector owns all of the factors of production, all resources. Every resource,
every worker, every factory, every acre of land, every risk-taking entrepreneur is all owned by
someone in the household sector.

Third, the business and government sectors exist to address the wants and needs of the household
sector. The business sector uses the resources owned by the household sector to produce the goods
and services consumed by the household sector. The government sector oversees the provision of
public goods and regulates economic activity so that the wants and needs of the household sector are
satisfied.

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