You are on page 1of 7



Three conditions of the mixed economy that are most important for macroeconomics, including full
employment, stability, and economic growth, that are generally desired by society and pursued by
governments through economic policies.
Macroeconomic goals are three of the five economic goals of a mixed economy that are most
important to the study of macroeconomics. They are full employment, stability, and economic growth.
Full Employment
Full employment is achieved when all available resources (labor, capital, land, and entrepreneurship)
are used to produce goods and services. This goal is commonly indicated by the employment of labor
resources (measured by the unemployment rate). However, all resources in the economy--labor,
capital, land, and entrepreneurship--are important to this goal. The economy benefits from full
employment because resources produce the goods that satisfy the wants and needs that lessens the
scarcity problem. If the resources are not employed, then they are not producing and satisfaction is
not achieved.
Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices.
Stability seeks to avoid the recessionary declines and inflationary expansions of business cycles. This
goal is indicated by month-to-month and year-to-year changes in various economic measures, such as
the inflation rate, the unemployment rate, and the growth rate of production. If these remain
unchanged, then stability is at hand. Maintaining stability is beneficial because it means uncertainty
and disruptions in the economy are avoided. It means consumers and businesses can safely pursue
long-term consumption and production plans. Policies makers are usually most concerned with price
stability and the inflation rate.
Economic Growth
Economic growth is achieved by increasing the economy's ability to produce goods and services. This
goal is best indicated by measuring the growth rate of production. If the economy produces more
goods this year than last, then it is growing. Economic growth is also indicated by increases in the
quantities of the resources--labor, capital, land, and entrepreneurship--used to produce goods. With
economic growth, society gets more goods that can be used to satisfy more wants and needs--people
are better off; living standards rise; and scarcity is less of a problem.
The three macroeconomic goals of full employment, stability, and economic growth are widely
considered to be beneficial and worth pursuing. Each goal, achieved by itself, improves the overall
well-being of society. Greater employment is typically better than less. Stable prices are better than
inflation. Economic growth is better than stagnation.
However, the pursuit of one goal often restricts attainment of others. For example, policies that
promote economic growth might create unemployment or policies that improve stability might limit
economic growth. Macroeconomic goals are also often in conflict with the microeconomic goals of
efficiency and equity.

Consider a few hypothetical situations, depicted by the hypothetical Republic of Northwest
Queoldiolia, in which the pursuit of one goal limits achieving another goal.
•Full Employment and Stability: The Central Bank of Northwest Queoldiolia seeks to promote lower
rates of unemployment through expansionary monetary policy. The economy expands,
unemployment falls, and full employment is achieved, but inflation emerges from the over stimulated

•Economic Growth and Full Employment: Seeking to keep pace with economic growth in neighboring
Southeast Queoldiolia, the President of Northwest Queoldiolia enacts an intense program of scientific
research and development. The program bears ample fruit, creating scores of new technological
innovations that lead to high rates of economic growth, but implementation of the innovations
disrupts the economy throwing millions of people who lack the necessary skills or training needed by
the new technologies out of work.

Policies and Politics

or financial instruments. The product markets exchange final goods and services. This. Note only factor services are exchanged through factor markets. Legal claims. Because the exchange of legal claims involves the counter flow of income. capital. the pursuit of these goals is largely directed by governments. legal claims. also termed goods or output markets. The financial markets exchange legal claims.The pursuit of these three macroeconomic goals is inherently an act of normative economics. or gross domestic product. Each set of markets exchange a different type of commodity important to the economy. also termed factor markets. those seeking to save income buy legal claims and those wanting to borrow income sell legal claims. he is operating through the product market. In fact. exchange the production of final goods and services. land. Liberals have tended to seek full employment over stability and economic growth. which owns the resources. fraught with exceptions. business." Normative economics is essential to the pursuit of economic goals. and factor services. Payment for these factor services then generate income received by the household sector. •Financial Markets: The commodity exchanged through financial markets is legal claims. Buyers and Sellers . The buyers of this production are the four macroeconomic sectors--household. and entrepreneurship--are traded through resource markets. government. In a mixed economy. the financial markets. and the resource markets. then she is participating in the resource markets. MACROECONOMIC MARKETS: Three sets of markets that make up the macroeconomy--product. more so than full employment. with that caution in mind. corporate stock. and foreign. The four macroeconomic sectors--household. The seller of this production is primarily the business sector. When Winston Smythe Kennsington III buys a few hundred shares of OmniConglomerate. of course. and resource--which exchange the three primary types of macroeconomic commodities--gross production. •Resource Markets: The services of the four factors of production--labor. business. The primary objective of macroeconomic theories is to explain activity that takes place in these three sets of markets. in contrast. not the actual factors. two viewpoints tend to emerge--liberal and conservative. As the discussion turns to politics and policies. and foreign-- interact through these three sets of markets.•Product Markets: The product markets. or financial instruments. land. of course. financial. Resource markets. brings into play the wonderful world of politics and never-ending debates over which of these three macroeconomic goals is most worth pursuing with economic policies. capital. what is formally termed gross domestic product. note that each of the two political views have historically placed greater emphasis on the attainment of some goals over others. These three aggregated macroeconomic markets are characterized by the basic types of commodities exchanged. The three groups of macroeconomic markets that form the foundation of macroeconomy are the product markets. When Duncan Thurly purchases a Deluxe Club Sandwich from Manny Mustard's House of Sandwich. especially price stability. When Pollyanna Pumpernickel takes a job working at the Wacky Willy factory assembling Wacky Willy Stuffed Amigos. represent ownership of physical assets (capital and other goods). and entrepreneurship. Inc. The resource markets exchange factor services. Generalities are. government. Conservatives. What They Are Each of the three groups of macroeconomic markets are commonly aggregated into theoretical constructs that combine the activity in hundreds of thousands of individual microeconomic markets. or the services of the four factors of production--labor. then he is operating in the financial markets. have sought economic growth and stability. the "norm" part of term normative economics is synonymous with the word "goal. are used by the business sector to acquire the factor services needed for production. A substantial part of macroeconomics is devoted to explaining how and why gross domestic product exchanged through the product markets rises or falls. However.

meaning it operates on both the selling side and the buying side. This sector is also on the buying side of the resource markets. especially the household sector. government. Borrowing. This revenue is then used to buy the factor services supplied by the household sector. Consider which sectors are the primary buyers and sellers for each market. •Business Sector: The business sector is THE primary participant on the selling side of the product markets. If often sells legal claims to raise funds needed to pay for the purchase of gross domestic product. and resource markets represent conduits of exchange activity among the household.•Household Sector: The household sector is the primary participant on the buying side of the product markets. When goods are imported into the domestic economy. A standard circular flow model is presented in the exhibit to the right. it is borrowing income that is more often than not used to purchase capital goods. When it sells legal claims. It acquires the factor services used for production from the household sector through the resource markets. The government acquires a portion of gross domestic product in the course of pursuing its designated functions. This is the sector responsible for production. it also purchases capital goods through the product markets. In fact. business. Lastly. This income is then used to purchase goods produced by the business sector. When it buys legal claims. on both the buying side and the selling side. and foreign sectors. the foreign sector is on the selling side of the product markets. •Government Taxes.The four macroeconomic sectors take part in each of the three sets of markets in various ways. commodities flow through these markets from sector to sector in a continuous. in that it owns all resources. This sector also surfaces on the selling side of the financial markets. •Business Revenue: The revenue received by the business sector at the far right is generated by selling production to the other sectors. A Circular Flow of Activity The Circular Flow Circular Flow The product. is also on the selling side of the resource markets.•Household Income: The income received by the household sector at the far left is generated by selling factor services to the business sector. When goods are exported from the domestic economy. In other words. the foreign sector is on the buying side of the product markets. and Spending: The tax revenue collected by the government sector in the center of the exhibit from the household sector is used to purchase output from the business . financial. •Foreign Sector: The foreign sector participants in the product markets. the income that it uses to purchase gross domestic product comes from selling factor services through the resource markets. This sector. Lastly. However. This sector regularly purchases almost two-thirds of all gross domestic product exchanged through the product markets. the business sector is largely on the selling side of the financial markets. it is lending (or saving) income. circular fashion. •Government Sector: The government sector participants on the buying side of the product markets along with the household and business sector. the household sector is on the buying side of the financial markets.

The Wacky Willy Company might be operating one of its Stuffed Amigos factories at half capacity or Herb Haberstone might leave a section of his farmland uncultivated. Around and around and around it goes. Inflation Inflation arises when the average price level in the economy consistently and persistently increases. The primary problems are unemployment. which reduces financial wealth and lowers living standards. any of the four factors of production can suffer unemployment. Unemployment is a problem because: •Less output is produced and thus the economy is less able to address the scarcity problem. In other words. •Greater uncertainty surrounds long-run planning. The Business Cycle . prices generally rise from month to month and year to year. MACROECONOMIC PROBLEMS: Undesirable situations that exist in the macroeconomy. Activity flows from sector to sector through each of the three markets. such as the time Pollyanna Pumpernickel was laid off from her job at the OmniMotors Car Company. Macroeconomic problems arise when the macroeconomy does not satisfactorily achieve the goals of full employment. inflation. stability. •Foreign Exports and Imports: The imports sold by the foreign sector at the very top to the domestic economy generates revenue that is often used to purchase exports from the domestic economy. Inflation is a problem because: •The purchasing power of financial assets such as money declines. Macroeconomic theories are designed to explain why these problems emerge and to recommend corrective policies. These problems are caused by too little or too much demand for gross production. Each of these situations is problematic because society is less well off than it would be by reaching the goals. and economic growth. While attention is usually focused on the unemployment of labor. with some prices rising more than the average. Unemployment means the economy is not attaining the macroeconomic goal of full employment. and stagnant growth. Unemployment results from too little demand and inflation emerges with too much demand. •The owners of unemployed resources receive less income and thus have lower living standards. The government sector also pays for a portion of these purchases with household sector saving that is borrowed through the financial markets. largely because one or more of the macroeconomic goals are not satisfactorily attained. Unemployment results when the goal of full employment is not achieved. Inflation is an average increase in prices. Unemployment Unemployment arises when factors of production that are willing and able to produce goods and services are not actively engaged in production. The resulting business sector revenue is then used to pay for factor services which becomes income that the household sector uses for taxes and saving. With inflation the economy is not attaining the stability goal. •Income and wealth can be haphazardly redistributed among sectors of the economy and among resource owners. and some even declining. Inflation exists when the economy falls short of the stability goal.sector through the product markets. some rising less. Stagnant growth means the economy is not adequately attaining the economic growth goal. For example. not every member of society is likely to experience exactly the same inflation. As such. especially the purchase of durable goods and capital goods.

For this reason. If. and thus fewer resources are employed. and more resources are employed. and entrepreneurship--can restrict the growth of production.Unemployment and inflation tend to vary with business-cycle instability. Aggregate demand is less. However. then growth is not likely to keep pace with expectations. The two most noted resource quality influences are technology and education. Reasons for stagnant growth can be identified with a closer look at the quantity and quality of the resources used for production. •Expansion: The expansion phase of a business cycle is characterized by a general rise in economic activity. Consider how these two problems connect to the two primary phases of the business cycle. Should either decline. investment expenditures by the business sector. inflation tends to be less of a problem. with robust production and jobs aplenty. If investment expenditures should decline or depreciation increase. business. Macroeconomic theories then explain macroeconomic phenomena by exploring the interaction among these four sectors. Along a similar line of reasoning. These four sectors are the primary "actors" on the macroeconomic stage. . Each sector is responsible for a different expenditure on gross domestic product: consumption expenditures by the household sector. government. the business sector. which could result from allocating fewer resources to scientific research can limit increases in the quantity of resources. restrictive government regulations and high taxes discourage The Wacky Willy Company and similar manufacturing companies from building new factories. If. Under these circumstances. then the total quantity of labor declines. capital. and foreign--that reflect four key macroeconomic functions and are responsible for four expenditures on gross domestic product. unemployment tends to be a key problem. Aggregate demand is higher. However. government purchases by the government sector. because markets are more likely to have surpluses than shortages. Edgar Millbottom decides to quit his job and spend his time doing nothing but vegetating on his parents living room sofa. •Quality: The quality of the four resources can also lead to stagnant growth. unemployment is more of a problem and inflation is less. for example. An increase in the total production of goods and services is generally needed to keep pace with an increase in the population of society and expectations of a rising living standard. and the foreign sector. production is greater. The quantity of capital depends on the amount of investment expenditures relative to the depreciation of the existing capital stock. land. meaning less output is produced. and net exports by the foreign sector. the government sector. At some times. then the economy is less likely to grow. unemployment tends to be less of a problem. Stagnant Growth The third problem of stagnant growth arises because the supply of aggregate production is not increasing at a desired pace or is even declining. This means the macroeconomic goal of economic growth is not attained. inflation tends to be the primary problem. The quantity of labor is based on both the overall population and the portion of the population willing and able to work. allocating fewer resources to education can also limit resource quality. MACROECONOMIC SECTORS: The four aggregate sectors of the macroeconomy--household. The lack of technological progress. •Quantity: The available quantities of the four factors of production--labor. for example. because markets are more likely to have shortages than surpluses. then the total quantity of capital declines. Demand for production often outpaces the ability to supply the production.•Contraction: The contraction phase of a business cycle is characterized by a general decline in economic activity. Stagnant growth exists if total production does not keep pace. The four aggregate macroeconomic sectors that form the foundation for macroeconomic analysis are the household sector. unemployment is less of a problem and inflation is more. At other times.

However. partnerships. regulation by the government sector. and external activity by the foreign sector. Federal Government--Congress. It also includes citizens and businesses in other nations. The government sector establishes the "rules of the game" and otherwise regulates resource allocation decisions of the other sectors. Manny Mustard. Of course. It includes proprietorships.Each sector also has a unique role to play in macroeconomic activity: consumption by the household sector.S. •Foreign Sector: This sector is comprised of everyone and everything outside the political boundaries of the domestic economy. and corporations. and local government responsible for passing and enforcing laws. Pollyanna Pumpernickel. imported from Northwest Queoldiolia. •Production: The business sector exists to combine the resources used for the production of the goods that satisfy wants and needs of the household sector. then the government sector is engaging in regulation. and Quedoldiolian Sundial Company. consumption would be less satisfying. The sale of Queoldiolian sundials. Production is illustrated by the creation of a Deluxe Club Sandwich by Manny Mustard's House of Sandwich. Consumption occurs if Pollyanna Pumpernickel enjoys a slice of pecan pie. What They Do: Macroeconomic Functions Each of the four sectors has a distinct functional role to play in the macroeconomy. •Business Sector: This sector contains the private. It includes households. profit-seeking firms in the economy that combine scarce resources into the production of wants-and-needs satisfying goods and services. such as Horst Duncanstein. •Government Sector: This sector includes all government entities that impose resource allocation decisions. Environmental Protection Agency. the ultimate objective of economic activity. state. If not for the productive efforts of the business sector. Inc. that might not be made otherwise. OmniConglomerate. In a word. Consider each sector. What They Buy: Aggregate Expenditures . all people. mega corporation. exemplifies a member of the business sector. also located in Northwest Queoldiolia. •External: The foreign sector is responsible for any and all economic activity that transpires beyond the political boundaries of the domestic macroeconomy. So too is the Shady Valley City Council and the local Shady Valley Board of Education included in the government sector. The foreign sector of the domestic United States economy includes the governments of other nations such as the Republic of Northwest Queoldiolia. a hardworking mother of two. and every member of society. multi- national. Promoting consumption by members of the household sector is. provides an example of external activity originating in the foreign sector. If the Shady Valley City Council imposes a tax on the sale jogging shoes. a proprietor who owns and operates a little sandwich shop is also part of the business sector. an affluent corporate executive. in essence. a multi-billion dollar. Department of Transportation. What They Are The four macroeconomic sectors are often delineated by who or what is included. etc. It consists of the three primary levels of federal. all branches and agencies of the U. and governments in other countries. a citizen of Northwest Queoldiolia. consuming population of the economy. So too is Winston Smythe Kennsington III. all consumers. wants-and-needs-satisfying. production by the business sector. on the rest of the economy.. businesses. eating. is a representative member of the household sector. It is responsible for all external activity. breathing.•Household Sector: This sector includes the entire. •Consumption: The primary macroeconomic function of the household sector is the consumption of goods and services that satisfy wants and needs. it includes everyone. •Regulation: The macroeconomic function performed by the government sector is regulation.--is part of the government sector.

all resources. •Net Exports: The expenditure on gross domestic product attributable to the foreign sector is net exports. Imports are subtracted from exports to adjust for imported goods included under the other three expenditure categories. goods produced by the domestic economy and purchased by the foreign sector. •Government Purchases: The government sector purchases a portion of gross domestic product to perform its assorted government functions. That is. The sale of domestically produced Wacky Willy Stuffed Amigos to someone living in Northwest Queoldiolia is an example of an export. These expenditures generally reflect the basic macroeconomic activity of consumption. and the services of employees.amosweb. highway construction. goods produced by the foreign sector and purchased by the domestic economy. investment expenditures include only those expenditures that acquire capital goods. •Second.Gross domestic product. The business sector purchases capital goods to facilitate the production of other goods. The business sector uses the resources owned by the household sector to produce the goods and services consumed by the household sector. Every resource. • . Inc. then government purchases have occurred. The government sector purchases this production to undertake regulation and to provide public goods.•First. •Consumption Expenditures: Expenditures on gross domestic product made by the household sector are consumption expenditures. All for One While each of the four sectors plays a key role in the macroeconomy. is divided among the four macroeconomic sectors. every acre of land. office supplies. When the Shady Valley City Council authorizes the purchase of paper clips and office supplies. •Investment Expenditures: The portion of gross domestic product purchased by the business sector is investment expenditures for capital goods. In effect. the household sector owns all of the factors of production. A prime example of investment expenditures is the purchase of a newly constructed factory by OmniConglomerate. The government sector oversees the provision of public goods and regulates economic activity so that the wants and needs of the household sector are satisfied. and imports. The purchase by a resident of Shady Valley of Queoldiolian sundials produced in Northwest Queoldiolia is an example of an import. Although the business sector "buys" a lot of things. a strong case can be made that the household sector rises head and shoulders above the others. the economy exists to satisfy the wants and needs of the household sector. every factory. the total output produced by the domestic economy. http://www. the satisfaction of wants and needs can occur without an expenditure (such as enjoying a scenic sunset) and expenditures can be made that do not result in the satisfaction of wants and needs (such as ice cream that melts before eaten). The purchase of raw materials or intermediate goods is not part of investment expenditures. every risk-taking entrepreneur is all owned by someone in the household sector. every worker. but the two terms are not necessarily identical. The purchase of a slice of pecan pie by Pollyanna Pumpernickel illustrates a consumption expenditure. the household sector includes all of the consumption-seeking members of society--the entire population. Net exports are the difference between exports. It IS society. the business and government sectors exist to address the wants and needs of the household Included in these purchases is such production as military equipment.