MICRO - MACRO ECONOMIC THEORY DEVELOPMENT

Development of Micro and Macro Theories


The development of modern economics began when Adam Smith (1723 - 1790) with his famous book Wealt of Nations (1976).  Economic symptoms such as rising prices for goods and increasing unemployment indicate a disturbance in the balance of the economic system.

Adam Sminth strongly believes that the market mechanism will be an efficient resource allocation tool, if the government does not interfere in the economy.  The classics like Jean Baptise, view the economy will not arise the problem of aggregate shortages, because all the goods produced by the economy will be bought by the public

Even Leon Waltras succeeded in developing a simultaneous market equilibrium economic model which is the basis of general equilibrium analysis.  Efficiency is not possible without balance, and vice versa balance is not possible without efficiency.

 There are two important assumptions in Classical Economic Theory:

 1. The process of adjustment through market mechanisms can be achieved at that time, meaning that between economic actors, exchanges, individuals involved are not limited by time and place

 2. The function of money is solely for transaction instruments


Keynes' Revolution: The Birth of Macroeconomic Theory


Before the economic depression of 1929-1933, economics did not recognize Micro-Macro differences, the economy only focused on individual behavior in achieving


balance. Prosperity arises because of higher human productivity, while improved productivity can encourage people to do specialization. Keynes's two main ideas are famous in his book The General Theory of Employment, Interest and Money 1936: Employment, Interest and Money 1936:

 1. The weakness of classical theory is that the assumptions about markets are considered too idealistic and are only emphasized on the supply side

 2. Include the role of government in the context of stimulating the demand side



Focus of Macroeconomics Discussion

In microeconomics only focus on analysis of individuals such as companies or producers, labor, and consumers in a context that is more limited to industry.

While in the macroeconomic focus of the discussion on how the behavior of economic agents in the overall context.  Overall the branch of economics has the same goal whether the allocation of economic resources is efficient or not.



Inflation Problems


Inflation is a price increase that is general and continuous.  In terms of economic theory, the phenomenon of inflation shows that excess demand at the macro level almost covers all industrial sectors experiencing excess demand.



Problems of Economic Growth

A growing economy or economic growth is a balance point where the amount of demand for goods and services in an economy during a certain period with the total supply of total production of goods and services in one economy over a certain period is better compared to the previous year.



Unemployment Problems

What is meant by unemployment is the labor force or people who are looking for work but do not get the desired job.


 As an example :

The unemployment rate is 10% per year, meaning that in a year 10% of the labor force does not get a job.

Theoretically the workforce that is still tolerated in a country is between 4% -5% of the total workforce each year.  If the percentage of unemployment is more than 5%, it can disrupt a country's security and social stability.



 Interaction with the International World

Economically, gains or losses as a result of international economic cooperation are detected through balance of payments analysis or currency exchange rates.




 Economic cycle

The balance or aggregate of economic growth is always up and down its cycle, and in general the economic cycle is short-term between 3-11 years, usually a contributing factor to seasonal changes.  While the long-term economic cycle between 30 - 70 years, caused by changes in social and political order and culture.


 The role of the government

In the macro economic discussion of the government in the economy has a very large portion.  Specifically studies in relation to fiscal policy and monetary policy.


Monetary policy is the policy of directing the macro economy towards better conditions by changing the amount of money in circulation.


Fiscal Policy is a policy of directing the macro economy to a better condition by changing government revenues and expenditures.



 Schools of thought in macroeconomic theory

Many macroeconomic theories, but all have their roots in the classical theory and Keynes's theory, although there are differences between the classical and Keynesian theories, but limited only to markets and the function of money.


While the debate between adherents of classical theory and Keynes's theory gives rise to a better and more realistic synthesis or new theory.


 Classical Stream

 A Classical Theory View of Markets

According to the classical flow, individuals will reach a balance if all resources are used up in order to achieve maximum targets with minimal costs.

The market is an efficient means of allocating resources, the inputs and outputs traded are homogeneous.

Therefore the price formed is an interaction between the strength of demand and supply.  If there is excess demand or supply, there will be a re-interaction of demand and supply so that a new equilibrium price is formed so that prices move very flexibly.


 The Classical View of Money

For kalisk people, money is inseparable from its function as a transaction tool, so that money does not affect the real variables (out and job opportunities).

Money only affects monetary variables, for example the price of goods. The effect of the view of the classical flow theory about money is that there is no need for the role of government in managing the economy, because price flexibility will drive efficient resources.



 Keynesian style

 Keynesian View of Markets


According to the Keynesian flow the market structure tends to be monopolistic, imperfect and asymmetrical information, which causes input prices and output prices to rise will be difficult to change back down.



 Keynesian View of Money

Money is not just a transaction tool but also a store of value.  Because this money is a storage function, it can be used to gain profit through speculation.


 Understanding Macroeconomic Models

 A. Classical Versus Keynesian Models

The simplest way to look at a Keynesian or classical economic model is to look at an asusmi about markets and money.  If the market is assumed to be competitive competition, little government interference, and money only as a transaction tool, then it is clear that this economy is a classic model.


Whereas if the market structure is assumed to be not perfect competition, and money not only as a transaction tool but also as a store for profit through speculation and government intervention, this economic model is Keynesian.


 Three Market Model

Both classic and Keynesian macroeconomic models are built based on the assumption that the economy consists of three markets.

 1. The labor market

 2. The market for goods and services

 3. Money Market.


 Macro balance is achieved if both the market or individually and together reach equilibrium.


 The Model of Balance and Imbalance


 The balance model is a model whose analysis is based on economic assumptions that will always reach equilibrium.


 Instead the imbalance model is a model whose analysis is based on the assumption that the economy is not always in balance.


 Static, Comparartive and Dynamic Static Models


 The static model is a macroeconomic model that ignores the dimension of time, an economic analysis of equilibrium or imbalance carried out in certain circumstances.


 The comparative static model is an economic model that compares the conditions of equilibrium from one condition to another.


 The Dynamic Model is an economic model whose analysis considers changes over time.


 Closed and Open economic models

 The closed economic model is an economy that assumes that the economy does not conduct transactions with other economies or without other countries.


 While an open economy is an economy that assumes that the economy deals with the registration of other countries.

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