Assessment: Macroeconomics Summary in the Eighth

Pages: 6 (1530 words)  ·  Bibliography Sources: 7  ·  Level: College Junior  ·  Topic: Economics  ·  Buy This Paper

Macroeconomics Summary

In the eighth edition of his seminal textbook Essentials of Economics, Bradley R. Schiller provides a comprehensible yet comprehensive review of the theoretical concepts which are central to microeconomics and macroeconomics, while also utilizing relatable real-world examples to reinforce main points. The first chapter of the book is entitled "The Challenge of Economics" and begins by describing the fundamental components of economic study, including the market system which is predicated on scarcity, resource allocation, and the law of supply and demand. According to Schiller's broadly constructed overview of macroeconomics in Chapter 1, "the central problem of scarcity forces every society to make difficult choices about the use of its scarce resources" (2010), and this dilemma specifically forces societies to answer three main questions on a continual basis: WHAT to produce, HOW to produce, and FOR WHOM to produce. The concept of resource allocation is introduced by observing that a society's collective want for goods and services (demand) is unlimited, while the resources needed to satisfy these wants (supply) is based on finite amounts of raw material, human capital, and other resources. A decided scarcity of bluefin tuna within global fish stocks, for example, results in a lack of this resource for all of its available uses, from sushi in Japan or tuna salad sandwiches in America, creating a production possibilities curve which has become increasingly flat, in terms of output, as time progresses (Monbiot, 2010). In other words, as the amount of tuna shrinks the global demand expands in conjunction with population growth, leading to an economic exercise in which markets will dictate how this resource is best utilized: If Japanese sushimen are willing to pay more for the dwindling stock, the lunchboxes of American schoolchildren will contain turkey salad sandwiches instead.

One of the main points discussed in Chapter 1 concerns the construction of the market structure described above within the context of various political systems, with a particular emphasis placed on the duality of capitalism and communism. Schiller touches briefly on the binary philosophical approaches to economic theory advocated by Adam Smith, who pioneered the free-market concept of private ownership embraced by the Western world today, and the state-ownership of production and manufacturing espoused by Karl Marx (2010). Under the free-market system of exchange fostered in capitalist economies, the concept of competitive advantage favors entrepreneurs, companies, and corporations that are capable of producing high-quality goods which can be sold for high prices. Capitalism is reliant on the integration of price signals as the key component of the free-market mechanism, with consumers indicating their affinity for specific goods by the act of paying a price for goods and services, and producers responding to these price signals by adjusting their production methods to ensure optimal levels of output at that price point. This emphasis placed on maximizing the efficiency of production to ensure the effective pursuit of profit is the driving engine of capitalist economics, with a free market dictating that enterprises must compete for their share of the consumer base. The theory of competitive advantage plays a direct role in the fiscal policy enacted by national governments, as the choice to adopt capitalism or communism can result in decades-long economic implications that affect millions of individual citizens. The catastrophic market failures to occur in the Soviet Union and North Korea are evidence that macroeconomic theory is directly applicable to real-world situations, as the collectivist market structure employed in these states proved to be woefully inadequate in terms meeting demand.

The second chapter of Essentials of Economics is entitled "The U.S. Economy" and begins by introducing one of the most central concepts in terms of the geopolitical applications of macroeconomic theory: Gross Domestic Product (GDP). The three critical questions of WHAT, HOW, and FOR WHOM goods and services are produced are again examined, but Chapter 2 limits its examination to the U.S. economy both domestically and through foreign trade. According to Schiller, "GDP refers to the total value of all final goods and services produced in a country during a given time period: it is a summary measure of a nation's output," but he couches this clinical statement by revealing that "although GDP is a convenient summary of how much output is being produced, it can be misleading" (2010). This proviso is important to consider when one realizes that the majority of news coverage concerning the domestic economy is premised on extrapolating theories from GDP data. A recent CNNMoney article, for example, reported that "Gross domestic product -- the broadest measure of economic output -- rose at a 2.5% annual pace in the first three months of the year, driven largely by a pick-up in consumer spending" (Kurtz, 2013), before engaging in the customary round of conjecture as to the underlying reasons for this encouraging economic activity. The rate at which consumers save, spend, and borrow are all mentioned as possible explanations for this rebound in GDP, in large part because the prevailing theory holds that the overall productivity of the American workforce is contingent on a rising level of per capita GDP.

Measuring the total output of a country's entire economy is the ostensible purpose of analyzing GDP data, but as Schiller observes, there are many observable trends within GDP data that can be used to interpret shifts in the societal structure created by various economic systems. An article published by The Economist engaged in this practice by approaching recently released GDP data from the context of American competitive advantage, stating that "one reason for optimism is that America's inventors are as busy as they have ever been, and its entrepreneurs are seizing on their ideas with the same alacrity as always," before citing evidence indicating that "investment in research and development as a share of output recently matched the previous record, 2.9% of GDP, set at the height of the space race" (2013). The underlying premise of the article is that the U.S. domestic economy has become systemically altered during the last 50 years, as the American workforce has been diverted largely to service-based industries rather than the traditional manufacture of goods for worldwide export that fueled the Industrial Revolution. Schiller echoes this sentiment in Chapter 2, when he observes that "in the twentieth century, as total output of the U.S. economy increased thirteen fold & #8230; the farm sector shrank and the manufacturing share of total output declined & #8230; (and) since 1930, the American economy has largely been a service economy" (2010). The transition from a manufacturing-based economy to one devoted to technological innovation and service industries was not a spontaneous phenomenon, and as Schiller shows throughout Chapter 2, the rampant expansion of international trade to arise in the wake of globalization necessitated a shift in the resource allocation policies of the U.S. government. With the newfound scarcity in traditional exports like timber, cotton, and steel after America's rapid Industrial Revolution, a fiscal policy premised on manufacturing made little sense in the latter 20th century, which is why the U.S. eventually structured its economy around continual consumption through the importation of manufactured goods, retail sales, and the service industries employed to operate the infrastructure of capitalist commerce.

Chapter # 1 Activities:

1. Return to the full list of countries in the Heritage Foundation's Index of Economic Freedom. Find the countries that rank #1, #51 and #101 to answer the questions below.

a. Fill in the table below.

Ranked #1

Ranked #51

Ranked #101

Country Name

Hong Kong

Israel

Benin

GDP

$351.1 billion

$235.2 billion

$14.7 billion

Unemployment

3.4%

6.9%

N/A

Government Spending as a percent of GDP

19.2% of GDP (88.9 Score)

45% of GDP (39.3 Score)

21.6% of GDP (86.1 Score)

Growth rate of GDP

5.0% growth

4.7% growth

3.1% growth

2. Visit the National Economic Accounts section of the Bureau of Economic… [END OF PREVIEW]

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