Economics is the science of the basics of efficient production of goods and services, their competent distribution and consumption. Studying it allows not only deeper understanding of the processes that we encounter in everyday life, but also changing the surrounding reality. The main macroeconomic identities characterize the key processes in the national and world economy. From a mathematical point of view, they clearly describe what we observe every day. The following main macroeconomic identities can be distinguished: equality of income and expenses, savings and investments, and the state budget.
Introduction to Macroeconomics
Each enterprise is a closed system. It is part of the national and even world economy. Therefore, although any enterprise works for its own benefit, it also benefits the whole society. His work is being studied by microeconomics. She studies the production, distribution and consumer activities of individual business entities. Microeconomics does not give an idea of the general state of affairs. But it allows you to assess the strengths and weaknesses of an individual subject, its capabilities and complexity of functioning.
The economy as a whole is studying macroeconomics. Its goal is to ensure sustainable development, not of the enterprise, but of countries or their groups. Historically, it originated later than microeconomics. Its formation is inextricably linked with the name of John Maynard Keynes, thanks to the tough methods of which the United States managed to recover from the Great Depression. In his works, he examined the relationship between employment, interest rates, and money supply. Macroeconomics is characterized by operating with aggregated indicators. The object of this section is not just the output of a single commercial enterprise, but the gross product, not the dynamics of prices for a single product, but the inflation rate. For the first time, this approach was widely used by Keynes in the 1930s. It should be noted that the founder of macroeconomics rejected the postulate of the "classics" about the ability of self-regulation embedded in the market system. He advocated strict government regulation of all key indicators.
National economy as a system
According to Keynes, unemployment is an essential characteristic of a market system. To reduce its level, the state should increase aggregate demand. However, equilibrium is possible with high unemployment. Keynes attached great importance to the interest rate. With it, the state can also regulate the amount of money in circulation. Keynes saw the national economy as a system. And its existence is associated with certain goals. The main macroeconomic identities reflect those key areas that can be regulated. Among the objectives of the functioning of the national economy are the following:
- Ensuring GDP growth in absolute terms and per capita indicators.
- Creation of jobs and support for citizens during the change of positions.
- Providing stable prices.
- Balancing the distribution of income.
- The development of the country's foreign economic sector, but not to the detriment of its own citizens, but to increase their well-being.
Basic macroeconomic identities (briefly)
To conduct a competent policy, the state needs to rely on some models. Aggregated indicators such as gross domestic product make it possible to assess progress, but practically do not give an idea of what methods need to be applied in order to change the current situation. And here the main macroeconomic identities come to the rescue. These models allow a deeper assessment of the situation, to see the weaknesses of the national economy. Among them, the main ones are the following equalities:
- Income and expenses.
- Savings and investments.
- State budget.
Equal Income and Cost
This is the basic macroeconomic identity. It simplistically reflects the components of gross domestic product. Equality of income and costs does not take into account indirect taxes, the difference between the types of investments, transfers of the business sector. The basic macroeconomic identity offers a way to calculate the gross domestic product by the size of expenses of various groups of entities. For a deeper analysis, there are a number of other indicators that are determined on the basis of GDP. Among them, for example, national income.
To understand the identity, let us designate the letter Y, the cost indicator of total output. The costs of the consumer, business and public sectors are C, I and G, respectively. Since our national economy is not a closed system, it is necessary to introduce one more indicator into the formula. This is a net export. We denote it by the letters NX. It will be equal to the difference between the country's exports and imports. Thus, the macroeconomic identity of income and expenses can be reduced to the following formula: Y = C + I + G + NX.
Savings and Investments
All the main macroeconomic identities reflect the real situation, but they make it a significant simplification. Equality of savings and investments considers the national economy separately from the outside world. It also excludes the public sector from the field of study. Then Y = C + I. This is a formula for calculating GDP in terms of costs in the absence of public and external sectors.
Now consider the gross domestic product from the point of view of entrepreneurs. All that they have earned can be spent or saved for investment in future periods. Thus, Y = C + S, where C is consumption and S is savings.
Let's combine both equations. We get: C + I = S + C. From the basic macroeconomic identity, it follows that, having reduced the same indicators on both sides, we can see the equality of investments and savings.
Formation of the state budget
The main macroeconomic identity suggests that in the long term, any country seeks to increase its own production and presence in the sales markets, including abroad. But first you need to be able to balance the state budget. We have already considered that all public sector revenues can be used for consumption and savings. The latter can be aimed at investing in real or in financial assets.
Simplify the model even more. By financial assets we will mean only money and government bonds. We introduce the notation. Sg - public sector savings, ΔM and ΔB - changes in the money supply and the value of bonds in circulation. Let's make one more appeal. Suppose that the state can spend all its savings either on increasing (decreasing) the money supply or changing the value of bonds issued by it. Thus, Sg = - (ΔM + ΔB). This is the identity of the state budget. It shows that the deficit can be financed only by increasing the supply of money or issuing government bonds.
Neo-Keynesian models
The national economy is an extremely complex system. And its functioning is fraught with a significant amount of uncertainty. The main macroeconomic indicators of identity are characterized by one hundred percent probability. This is the strength and weakness of all deterministic models. Representatives of the neo-Keynesian direction seek to expand the set of indicators. However, in most of their models, the only growth factor is investment.
Neoclassical Look
Representative models in this area are much more dynamic. Most of them allow state intervention in the functioning of the national economy, but only in times of crisis. Neoclassicists in their models also take into account factors such as changes in technology, skills of labor resources, and the efficiency of the organization of production processes.
