Economic thoughts by Eritrean perspective? Macroeconomics and its uses?

By Fesseha Nair

Economics is the science that concerns all human beings, from how societies produce goods and services, to how they consume them. It has influenced national and international financial markets at many important junctions throughout history and is vital part of our daily life.

In this article, we will look at the history of economic thought, how it has changed over time and the major participants in its development. Economics has two branches of studies. The first branch is microeconomics that studies the behaviour of individual consumers, firms and markets. Microeconomics differs from macroeconomics in two ways. First, microeconomics is more concerned with how individual markets differ than with how economy as a whole grows and fluctuates over time. Macroeconomics is the study that explains why the economy grows and fluctuates. Macroeconomics explains the determination of variables( C+I+G+ X-M) including the price level and the interest rate but the microeconomics considers this given.

Measuring  Gross Domestic production:

Using symbols.

Y= C+I+G+X, ( net exports)

WHERE Y= Gross domestic product

C= Consumption

I= Investment

G= Government spending

X=  Net exports ( exports minus imports)

Consumption is defined as spending by households. It includes purchase of durable goods such as washing machines, houses and many others. Non durables goods such as food, clothing etc.. Services such as haircuts, medical care and education…. Etc.

Investment  is the sum of spending by firms on goods such as plant, equipment, and inventories ans spending by households on housing.

Government spending is the sum of government purchases of goods and services. Such purchases includes building of schools, road construction and military hardware.

Exports and imports.

Exports are goods and services produced in home country and purchased by foreign consumers, business, or governments. Imports are goods and services produced abroad and purchased by the home consumers, business or government.

Note: Since exports are produced in the home country, they are counted as part of GDP even though they are produced but they are not part of domestic consumption, investment and or government purchases. Imports are produced abroad and they are not counted as part of GDP even though they are part of domestic consumption, investment, and government purchases. For these reasons, imports are subtracted from spending and exports are added to spending when computing GDP. In other words only net exports that export minus imports are added to the total volume of spending, sometimes it is called trade balance. Eritrea has no open economy at this time, therefore it is difficult to measure the performance of the economy and its gross domestic production.

Macroeconomics employs the basic ideas of microeconomics. When macroeconomics try to explain growth and fluctuations, they look at the behaviour of consumers and firms, the organization of labour markets and the industry, the working of financial markets and even the governments intervention. Adam Smith, the father of economics believed that competition was self-regulating and that governments should not take part in business through tariff, taxes. or any other means unless it was to protect free-market competition.

Why is the knowledge of micro and macroeconomic necessary for the general public? One answer is that macroeconomics is essential for good economic policy. If it is used appropriately by policy makers, it has the potential greatly to improve economic welfare in Eritrea.

Macroeconomics can help policy makers decide what to do to help avert recessions and ensure that recessions are as short and mild as possible when they occur.

Macroeconomics can help policy makers keep inflation low and stable without making the economy unstable in the short run. Many analysts feel that low and stable inflation is essential for strong long term economic growth. The government in Eritrea refused all suggestions about how government institutions can be designed to best ensure low and stable inflation. Any national economic policy has an aim to keep full employment  and low inflation.

Macroeconomics tells us how broad policy changes affect the types of goods produced in the economy. The Eritrean Governments policy of self –reliance has no any relation with economic thoughts of our modern micro and macroeconomic science but is similar with that of mercantilism hatred by modern scientists of economics.

What policies enables Eritrea to promote economic growth and raise its standard of living, and what are the policies that lead to poverty should be the issues to be discussed by the Eritrean opposition political and civic organizations. The Eritrean perspectives and knowledge of any issue either it is political, economic and social should have the goal to make aware our general public on improving the standard of their living and reducing poverty and igonarance.

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Posted by farajat on Sep 9 2009 Filed under Articles. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry