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Macroeconomic Balance in Modern Economics

Economics is a social science that entails how firms, households, and governments make choices when allocating resources which are scarce to meet their unlimited needs. Economics has two subdivision; Microeconomics and Macroeconomic. Microeconomics deals with the decision of individual households and firms with an objective of understanding the decision-making process of these individuals.  Macroeconomics deals with economic activities that concern aggregate economy as a whole. Macroeconomics includes study of national income, unemployment level, gross domestic products, and rate of growth, price level and inflation.

The following essay will explain in details macroeconomics balance as a basic concept of modern economics. Modern economists explain that for there to be a balance in the aggregate economy, there is the need to consider principles of macroeconomics which are; Full employment, economic growth, price stability, and balance of payment.

Full Employment

Full employment refers to a situation whereby there is no one in the economy which in not employed. However, according to Robert Pollin, 2 he defined full employment as a situation where at a given level of real wage, demand for labor is equal the supply available. Even in a full employment situation, there exist some kinds of unemployment.                                                                

There are three types of unemployment associated with full employment namely; Voluntary, frictional and involuntary unemployment. Voluntary unemployment is where individuals are not in jobs willingly. Involuntary unemployment occurs when individuals have tried to look for jobs, but they have been unsuccessful. Frictional unemployment is a situation which occurs when individuals are between jobs shifting from one job to another. John Keynes stated that unemployment becomes a serious concern when it is involuntary.3

For a balance in the macro economy, full employment has to be achieved, or the economy should be approaching full employment.

Balance of Payment (BOP)

The balance of payment refers to a summarized statement of economy's transactions with other countries in the world. The balance of payment is also referred to as the balance of international trade. BOP comprises of trade among countries residents and nonresidents. The balance of payment is classified into two i.e. current account and capital account. The capital account contains operation in fiscal instruments while current account contains transaction of commodities, investment income and current transfers.

Price Stability

Price stability occurs when market prices of commodities do not change with significant rates, they almost remain constant over time

Price stability is affected by inflation and deflation (Keynes, 2015).4 Inflation in an economy leads to decrease in economic growth by lowering the importance of savings while deflation leads to individuals postponing consumption while firms postpone investment. Therefore, price stability leads to positive economic growth and creates employment as the economy is stable.

Economic Growth

Economic growth can be defined as the increase in capacity production of a country in comparison from one period to another using the Gross net product. Economic growth can be expressed in two terms; real and nominal terms. Nominal term is all about inflation while real terms control inflation.

Economic growth is characterized by an increase in consumption, investment, stable prices of commodities, and higher living standards by households. The modern economists argue that economic growth is essential for a balanced economy.


Macroeconomics answers usual questions such as: what are the major effects of business cycles that are, occurrence of weaker and stronger economic development? Can a central bank's increase in the monetary supply leads to the real e?ects? What does an economy requires to achieve a long-run growth? Is it economical for one to decrease unemployment, if he or she accepts a rise in in?ation?


Keynes, John. The General Theory of Employment, Interest, and Money. StreetLib, 2015.

Mankiw, N. Gregory. Principles of Macroeconomics. Mason, OH: South-Western Cengage Learning, 2012.

Pollin, Robert. Back to Full Employment. Cambridge, Mass.: MIT Press, 2012.

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