Question

There are different economic explanations or theories for the business cycle that seek explaining how the economy’s output level, average price level, and unemployment / employment rates change together or co-vary. Explain in 200 to 300 words why economists seek these explanations and why these explanations when adopted by others for their use in business planning or legislating macroeconomic policy is important to you in your personal and working lives. Note there does not exist to date a single macroeconomic theory that explains the full extent of possible co-variation between the variables Real GDP, the average price level, and unemployment / employment.

Answer 1

To understand why economists seek these theories, we first must understand what economics is. Economics is the study of creation, distribution and consumption of wealth. By extension, economists study this to understand how the total benefit to the society can be maximized. In their goal of understanding how that can be one, they measure how well-off the society is. These measurements often include the GDP (total production- a measure of total wealth, of the society), the price level (how able people are to buy things), employment level (do most people have jobs?), etc. Of course, the study would be incomplete if we looked at these variables individually. After all, would we want a society which has very high GDP but a very high unemployment rate also (as implausible as it maybe)? Or would we want a society where almost everyone is employed, but get meager salaries and produce very little? No. So its important that our study aims to optimize all of these variables to the benefit of the society. And here, it becomes of extreme importance that we understand how these variables relate to each other- so that we can devise strategies that optimize all and not one over the detriment of the other.

So now that its clear why economists seek these theories, lets look at why these are important for us. When we say maximize the welfare of the society, it includes us as individuals too. So all decisions taken on the basis of these theories to maximize the societal benefit, it affects us too. When government decides to increase spending, the resulting inflation or higher taxes will affect me as an individual. Hence its very important to me as to which studies and policies are used to decide on these economical actions.