Editing Economics (section)

== Macroeconomics ==
{{Main|Macroeconomics}}
[[File:DiagFuncMacroSyst.pdf|thumb|upright=1.4|[[Circular flow of income|The circulation of money in an economy]] in a macroeconomic model. In this model, the use of [[natural resources]] and the generation of [[waste]], such as [[greenhouse gas]]es, is not included.]]
Macroeconomics, another branch of economics, examines the economy as a whole to explain broad aggregates and their interactions "top down", that is, using a simplified form of [[General equilibrium|general-equilibrium]] theory.{{sfnp|Blaug|2017|p=345}} Such aggregates include [[measures of national income and output|national income and output]], the [[unemployment rate]], and price [[inflation]] and subaggregates like total consumption and investment spending and their components. It also studies effects of [[monetary policy]] and [[fiscal policy]].

Since at least the 1960s, macroeconomics has been characterised by further integration as to [[microfoundations|micro-based]] modelling of sectors, including [[rational expectations|rationality]] of players, [[Efficient market hypothesis|efficient use]] of market information, and [[imperfect competition]].<ref>{{cite journal |title=Business Confidence and Depression Prevention: A Mesoeconomic Perspective |last=Ng |first=Yew-Kwang |author-link=Yew-Kwang Ng |journal=[[The American Economic Review]] |issn=0002-8282 |volume=82 |issue=2 |date=May 1992 |pages=365–371 |jstor=2117429}}</ref> This has addressed a long-standing concern about inconsistent developments of the same subject.<ref>{{cite encyclopedia |last1=Howitt |first1=Peter M. |date=1987 |dictionary=The New Palgrave Dictionary of Economics |edition= |editor-first1=John |editor-last1=Eatwell |editor-first2=Murray |editor-last2=Milgate |editor-first3=Peter |editor-last3=Newman |pages=273–276 |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde1987_X001367 |doi=10.1057/9780230226203.3008 |isbn=978-0-333-78676-5 |chapter=Macroeconomics: Relations with microeconomics |access-date=16 October 2017 |archive-date=17 October 2017 |archive-url=https://web.archive.org/web/20171017044005/http://www.dictionaryofeconomics.com/article?id=pde1987_X001367 |url-status=live }}</ref>

Macroeconomic analysis also considers factors affecting the long-term level and [[economic growth|growth]] of national income. Such factors include [[capital accumulation]], technological change and [[labour force]] growth.{{sfnp|Blaug|2017|p=349}}

=== Growth ===
{{Main|Economic growth}}

''Growth economics'' studies factors that explain [[economic growth]]&nbsp;– the increase in output ''[[per capita]]'' of a country over a long period of time. The same factors are used to explain differences in the ''level'' of output ''per capita'' ''between'' countries, in particular why some countries grow faster than others, and whether countries [[catch-up effect|converge]] at the same rates of growth.

Much-studied factors include the rate of [[Investment (macroeconomics)|investment]], [[population growth]], and technological change. These are represented in theoretical and [[empirical]] forms (as in the [[neoclassical growth model|neoclassical]] and [[endogenous growth model|endogenous]] growth models) and in [[growth accounting]].<ref>{{unbulleted list citebundle|{{harvp|Samuelson|Nordhaus|2010|loc=ch. 27, "The Process of Economic Growth"}}.|{{cite encyclopedia |author-link=Hirofumi Uzawa |last=Uzawa |first=H. |date=1987 |dictionary=The New Palgrave Dictionary of Economics |edition= |editor-first1=John |editor-last1=Eatwell |editor-first2=Murray |editor-last2=Milgate |editor-first3=Peter |editor-last3=Newman |pages=483–489 |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde1987_X001477 |doi=10.1057/9780230226203.3097 |isbn=978-0-333-78676-5 |chapter=Models of growth |access-date=16 October 2017 |archive-date=17 October 2017 |archive-url=https://web.archive.org/web/20171017042317/http://www.dictionaryofeconomics.com/article?id=pde1987_X001477 |url-status=live }}}}</ref>

=== Business cycle ===
{{Main|Business cycle}}
{{See also|Circular flow of income|Aggregate supply|Aggregate demand|Unemployment}}
[[File:Economic cycle.svg|thumb|A basic illustration of a [[business cycle]]]]
The economics of a depression were the spur for the creation of "macroeconomics" as a separate discipline. During the [[Great Depression]] of the 1930s, [[John Maynard Keynes]] authored a book entitled ''[[The General Theory of Employment, Interest and Money]]'' outlining the key theories of [[Keynesian economics]]. Keynes contended that [[aggregate demand]] for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.

He therefore advocated active policy responses by the [[public sector]], including [[monetary policy]] actions by the [[central bank]] and [[fiscal policy]] actions by the government to stabilise output over the [[business cycle]].<ref>{{cite book |last1=O'Sullivan |first1=Arthur |author-link=Arthur O'Sullivan (economist) |first2=Steven M. |last2=Sheffrin |author-link2=Steven M. Sheffrin |title=Economics: Principles in Action |publisher=Pearson Prentice Hall |year=2003 |page=396 |isbn=978-0-13-063085-8}}</ref> Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards [[full employment]] levels. [[John Hicks]]' [[IS/LM]] model has been the most influential interpretation of ''The General Theory''.

Over the years, understanding of the [[business cycle]] has branched into various [[research program]]mes, mostly related to or distinct from Keynesianism. The [[neoclassical synthesis]] refers to the reconciliation of Keynesian economics with [[classical economics]], stating that Keynesianism is correct in the [[short run]] but qualified by classical-like considerations in the intermediate and [[long run]].<ref name="Blanchard2008">{{cite encyclopedia |author-link=Olivier J. Blanchard |last=Blanchard |first=Olivier Jean |date=2008 |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |edition=2nd |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_N000041 |doi=10.1057/9780230226203.1172 |dictionary=The New Palgrave Dictionary of Economics |pages=896–899 |isbn=978-0-333-78676-5 |chapter=Neoclassical synthesis |access-date=17 November 2012 |archive-date=18 October 2017 |archive-url=https://web.archive.org/web/20171018013510/http://www.dictionaryofeconomics.com/article?id=pde2008_N000041 |url-status=live }}</ref>

[[New classical macroeconomics]], as distinct from the Keynesian view of the business cycle, posits [[market clearing]] with [[imperfect information]]. It includes Friedman's [[permanent income hypothesis]] on consumption and "[[rational expectations]]" theory,<ref>{{cite web |url=http://www.economics.harvard.edu/files/faculty/40_Macroeconomist_as_Scientist.pdf |title=The Macroeconomist as Scientist and Engineer |first=N. Gregory |last=Mankiw |publisher=Harvard University |date=May 2006 |archive-url=https://web.archive.org/web/20120118103900/http://www.economics.harvard.edu/files/faculty/40_Macroeconomist_as_Scientist.pdf |archive-date=18 January 2012}}</ref> led by [[Robert Lucas, Jr.|Robert Lucas]], and [[real business cycle theory]].<ref>{{cite encyclopedia |author-link=Stanley Fischer |last=Fischer |first=Stanley |date=2008 |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |edition=2nd |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_N000056 |doi=10.1057/9780230226203.1180 |dictionary=The New Palgrave Dictionary of Economics |pages=17–22 |isbn=978-0-333-78676-5 |chapter=New classical macroeconomics |access-date=17 November 2012 |archive-date=13 January 2014 |archive-url=https://web.archive.org/web/20140113071857/http://www.dictionaryofeconomics.com/article?id=pde2008_N000056 |url-status=live }}</ref>

In contrast, the [[New Keynesian economics|new Keynesian]] approach retains the rational expectations assumption, however it assumes a variety of [[market failures]]. In particular, New Keynesians assume prices and wages are "[[Sticky (economics)|sticky]]", which means they do not adjust instantaneously to changes in economic conditions.<ref name="Dixon2008">{{cite encyclopedia |last=Dixon |first=Huw David |date=2008 |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |edition=2nd |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_N000166 |doi=10.1057/9780230226203.1184 |dictionary=The New Palgrave Dictionary of Economics |pages=40–45 |isbn=978-0-333-78676-5 |chapter=New Keynesian macroeconomics |publisher=Palgrave Macmillan UK |access-date=17 November 2012 |archive-date=18 October 2017 |archive-url=https://web.archive.org/web/20171018013536/http://www.dictionaryofeconomics.com/article?id=pde2008_N000166 |url-status=live }}</ref>

Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are needed because the "long run" may be very long.

=== Unemployment ===
{{Main|Unemployment}}
[[File:US Unemployment rate 1990 to present.png|thumb|upright=1.4|The U.S. [[unemployment]] rate from 1990 to 2022]]
The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labour force. The labour force only includes workers actively looking for jobs. People who are retired, pursuing education, or [[discouraged worker|discouraged from seeking work]] by a lack of job prospects are excluded from the labour force. Unemployment can be generally broken down into several types that are related to different causes.<ref name=Dwivedi443>{{cite book|last=Dwivedi|first=D. N.|title=Macroeconomics: Theory and Policy|url=https://books.google.com/books?id=P1eFyp9Iku8C&pg=PP1|year=2005|publisher=Tata McGraw-Hill Education|isbn=978-0-07-058841-7}}</ref>

Classical models of unemployment occurs when wages are too high for employers to be willing to hire more workers. Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment.<ref name=Dwivedi443/>

[[Structural unemployment]] covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs.<ref>{{cite encyclopedia |last=Freeman |first=C. |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |date=2008 |edition=2nd |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_S000311 |doi=10.1057/9780230226203.1641 |title=The New Palgrave Dictionary of Economics |pages=64–66 |isbn=978-0-333-78676-5 |chapter=Structural unemployment |publisher=Palgrave Macmillan UK |access-date=9 September 2012 |archive-date=6 June 2013 |archive-url=https://web.archive.org/web/20130606035612/http://www.dictionaryofeconomics.com/article?id=pde2008_S000311 |url-status=live }}</ref> Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just the short term search process.{{sfnp|Dwivedi|2005|pp=444–445}}

While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates. [[Okun's law]] represents the empirical relationship between unemployment and economic growth.{{sfnp|Dwivedi|2005|pp=445–446}} The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.<ref>{{cite journal |last=Neely |first=Christopher J. |url=http://research.stlouisfed.org/publications/es/10/ES1004.pdf |title=Okun's Law: Output and Unemployment |journal=Economic Synopses |volume=4 |date=2010 |access-date=9 September 2012 |archive-date=4 December 2012 |archive-url=https://web.archive.org/web/20121204055537/http://research.stlouisfed.org/publications/es/10/ES1004.pdf |url-status=live }}</ref>

=== Money and monetary policy ===
{{Main|Monetary policy}}
{{See also|Monetary economics|History of money}}

[[Money]] is a ''means of final payment'' for goods in most [[price system]] economies, and is the [[unit of account]] in which prices are typically stated. Money has general acceptability, relative consistency in value, divisibility, durability, portability, elasticity in supply, and longevity with mass public confidence. It includes currency held by the nonbank public and checkable deposits. It has been described as a [[social convention]], like language, useful to one largely because it is useful to others. In the words of [[Francis Amasa Walker]], a well-known 19th-century economist, "Money is what money does" ("Money is ''that'' money does" in the original).<ref name="Walker1891">{{cite book|author=Francis Amasa Walker|author-link=Francis Amasa Walker|title=Money|url=https://books.google.com/books?id=2MJYSvaRqcwC|access-date=5 November 2017|year=1878|publisher=Henry Holt and Company|location=New York|page=405}}</ref>

As a [[medium of exchange]], money facilitates trade. It is essentially a measure of value and more importantly, a store of value being a basis for credit creation. Its economic function can be contrasted with [[barter]] (non-monetary exchange). Given a diverse array of produced goods and specialised producers, barter may entail a hard-to-locate double [[coincidence of wants]] as to what is exchanged, say apples and a book. Money can reduce the [[transaction cost]] of exchange because of its ready acceptability. Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces.<ref>{{cite encyclopedia |author-link=James Tobin |last=Tobin |first=James |date=1992 |chapter=Money (Money as a Social Institution and Public Good) |title=The New Palgrave Dictionary of Money and Finance |volume=2 |editor-first1=Peter K. |editor-last1=Newman |editor-first2=Murray |editor-last2=Milgate |editor-first3=John |editor-last3=Eatwell |pages=770–771 |publisher=Macmillan |isbn=978-1-5615-9041-4 |url=https://books.google.com/books?id=b0UOAQAAMAAJ&pg=PP1}}</ref>

Monetary policy is the policy that central banks conduct to accomplish their broader objectives. Most central banks in developed countries follow [[inflation targeting]],<ref>{{cite web |url=http://www.imf.org/external/pubs/ft/fandd/basics/target.htm |title=Inflation Targeting: Holding the Line |last=Jahan |first=Sarwat |publisher=International Monetary Funds, Finance & Development |access-date=13 September 2023}}</ref> whereas the main objective for many central banks in development countries is to uphold a [[fixed exchange rate system]].<ref name=IMF>{{cite book |last1=Department |first1=International Monetary Fund Monetary and Capital Markets |title=Annual Report on Exchange Arrangements and Exchange Restrictions 2022 |date=26 July 2023 |publisher=International Monetary Fund |isbn=979-8-4002-3526-9 |url=https://www.elibrary.imf.org/display/book/9798400235269/9798400235269.xml?code=imf.org |access-date=13 September 2023 |language=en }}</ref> The primary monetary tool is normally the adjustment of interest rates,<ref name=RBA>{{cite web |last1=Baker |first1=Nick |last2=Rafter |first2=Sally |title=An International Perspective on Monetary Policy Implementation Systems {{!}} Bulletin – June 2022 |url=https://www.rba.gov.au/publications/bulletin/2022/jun/an-international-perspective-on-monetary-policy-implementation-systems.html |publisher=Reserve Bank of Australia |access-date=13 September 2023 |language=en-AU |date=16 June 2022}}</ref> either directly via administratively changing the central bank's own interest rates or indirectly via [[open market operation]]s.<ref>{{cite book |title=MC Compendium Monetary policy frameworks and central bank market operations |date=October 2019 |publisher=Bank for International Settlements |isbn=978-92-9259-298-1 |url=https://www.bis.org/publ/mc_compendium.pdf}}</ref> Via the [[monetary transmission mechanism]], interest rate changes affect [[investment]], [[Consumption (economics)|consumption]] and [[net export]], and hence [[aggregate demand]], [[Output (economics)|output]] and employment, and ultimately the development of wages and inflation.

=== Fiscal policy ===
{{Main|Fiscal policy|Government spending|Tax}}

Governments implement fiscal policy to influence macroeconomic conditions by adjusting spending and taxation policies to alter aggregate demand. When aggregate demand falls below the potential output of the economy, there is an [[output gap]] where some productive capacity is left unemployed. Governments increase spending and cut taxes to boost aggregate demand. Resources that have been idled can be used by the government.

For example, unemployed home builders can be hired to expand highways. Tax cuts allow consumers to increase their spending, which boosts aggregate demand. Both tax cuts and spending have [[Fiscal multiplier|multiplier effects]] where the initial increase in demand from the policy percolates through the economy and generates additional economic activity.

The effects of fiscal policy can be limited by [[Crowding out (economics)|crowding out]]. When there is no output gap, the economy is producing at full capacity and there are no excess productive resources. If the government increases spending in this situation, the government uses resources that otherwise would have been used by the private sector, so there is no increase in overall output. Some economists think that crowding out is always an issue while others do not think it is a major issue when output is depressed.

Sceptics of fiscal policy also make the argument of [[Ricardian equivalence]]. They argue that an increase in debt will have to be paid for with future tax increases, which will cause people to reduce their consumption and save money to pay for the future tax increase. Under Ricardian equivalence, any boost in demand from tax cuts will be offset by the increased saving intended to pay for future higher taxes.

=== Inequality ===
{{Main|Economic inequality}}

Economic inequality includes [[income inequality]], measured using the [[distribution of income]] (the amount of money people receive), and [[wealth inequality]] measured using the [[distribution of wealth]] (the amount of wealth people own), and other measures such as consumption, land ownership, and [[human capital]]. Inequality exists at different extents between countries or states, groups of people, and individuals.<ref name="urlWealth Distribution and Income Inequality by Country 2018 | Global Finance Magazine">{{Cite web|url=https://www.gfmag.com/global-data/economic-data/wealth-distribution-income-inequality|title=World Wealth Distribution And Income Inequality 2022|first1=Luca |last1=Ventura
|website=Global Finance Magazine|date=12 January 2022 }}</ref> There are [[income inequality metrics|many methods]] for measuring inequality,<ref>{{cite journal |last1=Trapeznikova |first1=Ija |title=Measuring income inequality |journal=IZA World of Labor |date=2019 |doi=10.15185/izawol.462 |url=https://wol.iza.org/articles/measuring-income-inequality|doi-access=free }}</ref> the [[Gini coefficient]] being widely used for income differences among individuals. An example measure of inequality between countries is the [[List of countries by inequality-adjusted HDI|Inequality-adjusted Human Development Index]], a composite index that takes inequality into account.<ref>Human Development Reports. [http://hdr.undp.org/en/content/inequality-adjusted-human-development-index-ihdi Inequality-adjusted Human Development Index (IHDI)] {{Webarchive |url=https://web.archive.org/web/20190712222023/http://hdr.undp.org/en/content/inequality-adjusted-human-development-index-ihdi |date=July 12, 2019}}. ''United Nations Development Programme''. Retrieved: March 3, 2019.</ref> Important concepts of equality include [[Equity (economics)|equity]], [[equality of outcome]], and [[equality of opportunity]].

Research has linked economic inequality to political and social instability, including [[revolution]], democratic breakdown and civil conflict.<ref name="MacCulloch">{{Cite web |title=Introduction to Inequality |url=https://www.imf.org/en/Topics/Inequality/introduction-to-inequality |access-date=May 9, 2022 |website=IMF |language=en}}</ref><ref>{{Cite journal |last1=MacCulloch |first1=Robert |year=2005 |title=Income Inequality and the Taste for Revolution |journal=The Journal of Law and Economics |volume=48 |issue=1 |pages=93–123 |doi=10.1086/426881 |jstor=10.1086/426881 |s2cid=154993058}}</ref><ref name="Acemoglu">{{Cite book |last1=Acemoglu |first1=Daron |url=https://www.cambridge.org/core/books/economic-origins-of-dictatorship-and-democracy/3F29DF90519971B183CAA16ED0203507 |title=Economic Origins of Dictatorship and Democracy |last2=Robinson |first2=James A. |date=2005 |publisher=Cambridge University Press |isbn=978-0521855266 |location=Cambridge |doi=10.1017/cbo9780511510809}}</ref><ref>{{Cite book |last1=Cederman|first1=Lars-Erik |last2=Gleditsch|first2=Kristian Skrede |last3=Buhaug|first3=Halvard |url=https://www.cambridge.org/core/books/inequality-grievances-and-civil-war/39F26D12EFEE2D7D621A59DF74DED496 |title=Inequality, Grievances, and Civil War |publisher=Cambridge University Press |year=2013|isbn=978-1107017429|doi=10.1017/cbo9781139084161}}</ref> Research suggests that greater inequality hinders economic growth and macroeconomic stability, and that land and [[human capital]] inequality reduce growth more than inequality of income.<ref name="MacCulloch" /><ref>{{cite journal |last1=Neves |first1=Pedro Cunha |last2=Afonso |first2=Óscar |last3=Silva |first3=Sandra Tavares |year=2016 |title=A Meta-Analytic Reassessment of the Effects of Inequality on Growth |journal=World Development |volume=78 |pages=386–400 |doi=10.1016/j.worlddev.2015.10.038}}</ref> Inequality is at the centre stage of [[economic policy]] debate across the globe, as government tax and spending policies have significant effects on income distribution.<ref name="MacCulloch" /> In advanced economies, taxes and transfers decrease income inequality by one-third, with most of this being achieved via public social spending (such as pensions and family benefits.)<ref name="MacCulloch" />