Macro Mechanics Essay
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The first chapter “Introduction” provides detailed overview of the book content. The author discusses the scope of the book, its goals and objectives, and special attention is paid to chapters’ content. David Ashby, the author of the book, argues that the key task of economy is “to coordinate the kinds and quantities of goods and services produced with the kinds and quantities that buyers want”. (p. 1) Central government planning is assumed to deal with coordination among monetary capacity and demand for output, whereas the book’s goal is to present how this process is being accomplished in market-oriented economy and in private enterprises.
Ashby stresses that, for example, in the USA coordination process is automatic process meaning it doesn’t need government involvement; coordination process has evolved through the changes in interest rates, employment levels, prices and output. Ashby discusses the disturbances that trigger coordination process and highlights peculiarities of the macroeconomic coordination process. Actually, he defines macroeconomics as the study of policy methods for manipulating levels of coordination process; moreover, macroeconomics is the study of key determinants of employment levels, interest rates, prices and outputs.
In this respect, the book offers original approach to modern macroeconomic analysis. The author recommends three aggregative magnitudes for examining coordination process: GDP that represents annual rates of national produced goods and services; APE that represents current rate of demand; and ASF that represents the limit imposed on annual purchase of current output. Further, Ashby stresses the importance of studying macroeconomics because it gives an excellent opportunity for becoming more informed choices instead of a voter.
Thus, modern person should be able to assess quickly what he future employment prospects are, what the current macroeconomic situation is, and what actions the government can take in crisis situations. The book consists of 16 chapters and several tables that illustrate the nature of economic coordination process and its dependency on twenty-four fundamental relations. Chapter 2 provides extended definition of GDP, how it is measured why it is important for macroeconomic coordination process.
Chapter 3 discusses the concept of GDY stressing that it equals GDP, but its key goal is to measure the incomes produced during the national output production. The next chapter highlights the concept of APE and discusses its dependency on employment, output, interest rates and prices. Chapter 5 provides definition of ASF and explains its key fundamentals and its relations with income and interest rates. Chapter 6 discusses the third aggregative multitude – ADF – and examines its relations with ASF. Their interplay is funding adjustment.
Chapter 7 and 8 examine the “microeconomic foundations of the output-price adjustments that commence whenever APE and GDP are unequal”. (p. 6) employment levels, interest rates, prices and output make coordination process function effectively through changes and restoring equality. Chapters 8 and 9 discuss the causes and reasons of inequalities among ASF, APE and GDP identifying inequality situations. Chapters 11 and 12 concentrate on the monetary and fiscal policy used for manipulating the macroeconomic coordination process. Chapter 13 and 14 address induced business cycles, international and foreign trade, income policies.
Special attention is paid to policy hurdles that may lead to liquidity traps, macroeconomic inconsistency or timing lags. Chapter 15 examines trade impacts and trade restrictions. The final chapter draws relevant conclusions about macroeconomic coordination, and provides fresh look at exchange rate regimes and exchange rate determination in relation to domestic fiscal and monetary policies. Chapter 2: Summary The second chapter “Output” provides extended definition of GDP or Gross Domestic Product, prices level indexes, and discusses the ways how to adjust Gross Domestic Product.
Ashby writes that a nation has three limited factors of production – resources/and, labor and capital. Firstly, resource/land includes not only the land itself, but also animals, mineral resources, vegetables that are obtained from the land. Secondly, labor resource is human work effort. Thirdly, capital includes everything that refers to producing goods and services as, for example, machines, buildings, tools, processed ingredients and manufactured parts. Ashby writes that production processes “combine quantities of resources/land, labor, and capital to create a wide variety of goods (i.
e. , merchandise) and services”. (p. 10) Nevertheless, the negative moment is that existing technologies and availability o factors limit what the nation is able to produce. Therefore, Gross Domestic Product or GDP is very important for macroeconomic coordination process as it helps to calculate what the nation can produce and what benefit it will give to the nation. GDP is defined as “the value of the total output of goods and services produced within a country during a year’s time”. (p. 11) The market values are added together for calculating the GDP.
In particular, the Department of Commerce puts together the actual average selling prices and the number of units produced. Nevertheless, it is necessary to remember that the Department of Commerce has to deduce cost of any foreign materials and services, as well as materials and services that have been measured as GDP of other producer. Ashby writes that “price shall refer to the market value per unit of the product minus any multiple counting of costs as well as any costs or profits owed to entities outside of the country”. (p.
12) Of course, data problems are immense as calculating GDP is a complicated process even for professionals. No errors are allowed as GDP reflects national stability and economic growth. For example, one of the problems is lack of data and, therefore, some of the products may not be included into GDP calculations. Further, the author writes that cost and market values are not the same. The key difference is profits meaning that market value equal cost value plus profit. This peculiarity should be remembered to avoid errors in calculations.
Moreover, problems are associated with unit price as well because for defense, fire, education and policies services no unit price is provided. There is no surprise that the Department of Commerce isn’t allowed to determine the values of either goods or services produced for own use. The Department of Commerce has also to measure the value of the output using prevailing prices. As far as the level of prices and costs are changing, the magnitude of prevailing prices is changing as well challenging accuracy of the calculations.
Ashby indicates that “a suitable measure for the volume of domestic output must change only when the volume of domestic output changes and must change in the same direction and by the same percentage as does the output value”. (p. 14) Finally, price level indexes are used for removing the influence of cost and price changes. It is know that GDP represents the volume of goods and services produced within one year; otherwise, GDP represents the annual the annual rate displaying country’s produced output.
Of course, it is necessary to remember that GDP is adjusted value meaning that changes in level prices result in changes in the value of the output. Chapter 3: Summary The third chapter stresses the differences between gross domestic product and gross domestic income. The only source of income is, actually, production. The author mentions that one should not misuse ‘gross domestic product’ and ‘gross domestic income’ as they different concepts. In particular, gross domestic product is the measurement of production, whereas the gross domestic income is the measurement of income.
One more moment to remember is that their magnitudes are equal: if gross domestic product is changing, gross domestic income is changing as well in the same amount and in the same direction. Ashby underlines that “there can be no change in gross domestic income without a matching a change gross domestic product”. (p. 24) Further, the author discusses three important notions in the chapter. Firstly, it is necessary to understand that gross domestic product is measured as the output is produced, and it identifies the values of the products that are expected to be sold either at domestic or foreign markets.
It means that some products may appreciate in market values, whereas other may deteriorate awaiting the sale. Therefore, matching adjustments should be definitely made for identifying both gross domestic income and gross domestic product. Secondly, money and income are two different notions; they are not the same thing. Income is defined as the result of money, and money is argued to be a messenger that delivers humans the income. Nevertheless, income can also be received in non-money form as, for example, insurance policies, retirement packages, etc.
Interestingly, Ashby recommends distinguishing between ‘people earning income’ and ‘people earning money’. Income is generated by producing goods and services, but income doesn’t generate money. New income is often generated by the old money. Thirdly, Ashby underlines the role that credits are playing in modern economies. The role of credits is critical to economic development and country’s prosperity. Credits give producers an opportunity to produce goods and services, to sell their goods before they are to pay the bills, etc.
The chapter highlights the concepts of shared incomes and shared sales. In particular, the author discusses the shares of gross domestic income that are received for producing gross domestic output. The role of specialization is underlined as well. Ashby writes that modern economies of well-developed countries enjoy high standards of living due to specialization. Actually, specialization involves “structuring production processes in ways that enable workers and machines to restrict their efforts to a small number of tasks for which they are particularly well suited”.
(p. 26) However, the key negative moment is that specialization may result in reduced self-sufficiency. Specialization requires earnings to be paid in money form for purchasing goods and services. The author defines federal debt as “the total of all Treasury securities that have been issued but have not yet matured”. (p. 43) For example, the federal debt of the USA in 2008 was more than $9 trillion. Of course, the debt is huge and the country has to develop fiscal policies to reduce federal debt and to prevent its re-occurrence in the future.
Budget deficits may be avoided by levying sufficient tax increases and generating adequate national revenues. Ashby blames federal government for doing nothing to reduce debt balances. As far as the government never pledges collateral, it may borrow any necessary time. Therefore, sovereign federal government can’t go bankrupt. As far as the US is able to borrow, its national debt is increasing and increasing. The tendency is negative because when the time to pay credits comes, what will the government do?