Macroeconomics is a branch of economics that examines the economy as a whole and answers questions such as 'What causes the economy to grow over time?', 'What causes short-run fluctuations in the economy?' 'What influences the values various economic indicators and how do those indicators affect economic performance?
There are some theories and models that are used as guidelines in measuring the growth of a country’s economy.
One of these is the EXOGENOUS GROWTH MODEL (NEO-CLASSICAL MODEL).
The Exogenous growth model was an extension to the Harrod-Domar model which included the new term, "productivity growth". The most important contributor to this model, Robert Solow; in 1956 developed a relatively simple growth model which fit available data on US economic growth with some success.
Solow extended the Harrod-Domar model by:
· Adding labor as a production factor;
· Requiring diminishing returns to labor and capital separately, and constant returns to scale for both factors combined;
· Introducing a time-varying technology variable distinct from capital and labor.
The capital-output and capital-labor ratios are not fixed as they are in the Harrod-Domar model. These refinements allowed increasing capital intensity to be distinguished from technological progress.
The key assumption of this model is that capital is subjected to diminishing returns. Given a fixed stock of labor, the impact on output of the last unit of capital accumulated will always be less than the one before. Assuming for simplicity no technological progress or labor force growth, diminishing returns implies that at some point the amount of new capital produced is only just enough to make up for the amount of existing capital lost due to depreciation. At this point, because of the assumptions of no technological progress or labor force growth, the economy ceases to grow.
Assuming non-zero rates of labor growth complicates matters somewhat, but the basic logic still applies- in the short-run the rate of growth slows as diminishing returns take effect and the economy converges to a constant "steady-state" rate of growth.
Including non-zero technological progress is very similar to the assumption of non-zero workforce growth, in terms of "effective labor": a new steady state is reached with constant output per worker-hour required for a unit of output. However, in this case, per-capita output is growing at the rate of technological progress in the "steady-state".
Assuming non-zero rates of labor growth complicates matters somewhat, but the basic logic still applies- in the short-run the rate of growth slows as diminishing returns take effect and the economy converges to a constant "steady-state" rate of growth.
Including non-zero technological progress is very similar to the assumption of non-zero workforce growth, in terms of "effective labor": a new steady state is reached with constant output per worker-hour required for a unit of output. However, in this case, per-capita output is growing at the rate of technological progress in the "steady-state".
The application of this theory in the RP setting is that we all know that technology is widely used even in our country. The application of this theory is that it uses the technology as the foundation of production. We all know that technology improves as time goes by which makes this more effective. Since the foundation of production of capital is technology, the production capital increases as technology improves. It is believed that as long as we have the similar characteristics as the rich countries, and implying this model will help us catch up with other countries such as USA or Japan. There is a high possibility that our country will increase if we start using this theory.
Another is the The Classical Theory of Employment (Theory of John Maynard Keynes) -KEYNESIAN THEORY
According to Keynes, most treatises on the theory of value and production are primarily concerned with the distribution of a given volume of employed resources between different uses and with the conditions which, assuming the employment of this quantity of resources, determine their relative rewards and the relative values of their products.
The classical theory of employment — supposedly simple and obvious — has been based. I think, on two fundamental postulates, though practically without discussion, namely:
- 1. The wage is equal to the marginal product labor
- 2. The utility of the wage when a given volume of labor is employed is equal to the marginal disutility of that amount of employment
This means that the wage of an employed person is equal to the value which would be lost if employment were to be reduced by one unit. And, the real wage of an employed person is that which is just sufficient to induce the volume of labor actually employed to be forthcoming. Disutility must be here understood to cover every kind of reason which might lead a man, or a body of men, to withhold their labor rather than accept a wage which had to them a utility below a certain minimum.
Four possible means of increasing employment:
- An improvement in organization or in foresight which diminishes ‘frictional’ unemployment;
- A decrease in the marginal disutility of labor, as expressed by the real wage for which. Additional labor is available, so as to diminish ‘voluntary’ unemployment;
- An increase in the marginal physical productivity of labor in the wage-goods industries
- An increase in the price of non-wage-goods compared with, the price of wage-goods, associated with a shift in the expenditure of non-wage-earners from wage-goods to non-wage-goods.
Application of this theory in the RP setting: As we all know, Philippines, our country is known for having low employment rate. This is one of the reasons why our economy is not good. There are many Filipinos looking for stable jobs. But, now a day’s most of the graduate students are unemployed because the government and private sectors failed to institute meaningful measures to correct the mismatch between skills and job. Another is, some Filipinos are willing to work abroad to have high wages. In our country the salary of an individual is not worth to the service he/she is giving. With that, others leave this country to have a good salary. I think Philippine economy should work on a theory to help unemployed individual. The above theory is an example to have a good employment rate in a country. Its focus is on the corresponding wages of an employed citizen.
Another one is the Classical Growth Theory
The modern conception of economic growth began with the critique of Mercantilism, especially by the physiocrats and with the Scottish Enlightenment thinkers such as David Hume and Adam Smith, and the foundation of the discipline of modern political economy. The theory of the physiocrats was that productive capacity, itself, allowed for growth and the improving and increasing capital to allow that capacity was "the wealth of nations". Whereas they stressed the importance of agriculture and saw urban industry as "sterile", Smith extended the notion that manufacturing was central to the entire economy.
David Ricardo argued that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of "comparative advantage" would be the central basis for arguments in favor of free trade as an essential component of growth.
Classical growth theory may also apply in present whereas they stressed the importance of agriculture which is true, and also one of the main sources of livelihood in our country. Although this theory see the urban industry as sterile, I somewhat disagree like David Ricardo because even in past and present time we Filipino’s already perform trading, which connect us to other countries and build a good relation to other neighboring countries.
Lastly, Fine-Tuning Theory by Walter Heller
Fine tuning is attributed to American economist Walter Heller (1915-1987), and is used to refer to short-run interventionist approach to the economy using monetary and fiscal policies to control fluctuations in demand.
It says here that the government has a role and should have to do something in regulating inflation and unemployment.
It involved altering fiscal policy continually to stabilize national income as close to its full-employment potential as possible.
The application of this theory in the RP setting will be a big help in our economy. They should give importance to this, especially today that we're experiencing a kinda high rate of unemployment. The government should monitor and balance the inflation in our economy because some people are taking advantage on this, like adding too much price on such things. Unemployment should also be monitored for us to have a good economy and to help those people who don’t have work. There should be a balance between the inflation and the unemployment.
There are a lot of theories to be considered in improving our economy. And we think that it’s not a waste of time to try and there’s even no harm in trying just for us to have stable economy for our country.
We know, we all hope for the betterment of our economy. And we won’t stop hoping..and hoping..and hoping for that.
