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Macroeconomic policy

Top-down policy by GOVERNMENT and CENTRAL BANKS, usually intended to maximise GROWTH while keeping down INFLATION and UNEMPLOYMENT. The main instruments of macroeconomic policy are changes in the rate of INTEREST and MONEY SUPPLY, known as MONETARY POLICY, and changes in TAXATION and PUBLIC SPENDING, known as FISCAL POLICY. The fact that unemployment and inflation often rise sharply, and that growth often slows or GDP falls, may be evidence of poorly executed macro­economic policy. However, BUSINESS CYCLES may simply be an unavoidable fact of economic life that macroeconomic policy, however well conducted, can never be sure of conquering.

Macroeconomics

The big picture: analysing economy-wide phenomena such as GROWTH, INFLATION and UNEMPLOYMENT. Contrast with MICROECONOMICS, the study of the behaviour of individual markets, workers, households and FIRMS. Although economists generally separate themselves into distinct macro and micro camps, macroeconomic phenomena are the product of all the microeconomic activity in an economy. The precise relationship between macro and micro is not particularly well understood, which has often made it difficult for a GOVERNMENT to deliver well-run MACROECONOMIC POLICY.

Manufacturing

Making things like cars or frozen food has shrunk in importance in most developed countries during the past half century as SERVICES have grown. In the United States and the UK, the proportion of workers in manufacturing has shrunk since 1900 from around 40% to barely 20%. More than two-thirds of OUTPUT in OECD countries, and up to four-fifths of employment, is now in the services sector. At the same time, manufacturing has grown in importance in DEVELOPING COUNTRIES.

Many people think that manufacturing somehow matters more than any other economic activity and is in some way superior to surfing the Internet or cutting somebody's hair. This is prob­ably nothing more than nostalgia for times past when making things in factories was what real men did, just as 150 years ago growing things in fields was what real men did. Mostly, the shift from manufacturing to services (as with the earlier shift from agriculture to manufacturing) reflects progress into jobs that create more UTILITY, this time for real women as well as real men, which may explain why it is happening first in richer countries.

Marginal

The difference made by one extra unit of something. Marginal revenue is the extra revenue earned by selling one more unit of something. The marginal PRICE is how much extra a consumer must pay to buy one extra unit. Marginal UTILITY is how much extra utility a person gets from consuming (or doing) an extra unit of something. The marginal product of LABOUR is how much extra OUTPUT a firm would get by employing an extra worker, or by getting an existing worker to put in an extra hour on the job. The marginal PROPENSITY to consume (or to save) measures by how much a household's CONSUMPTION (SAVINGS) would increase if its INCOME rose by, say, $1. The marginal tax rate measures how much extra tax you would have to pay if you earned an extra dollar.

The marginal cost (or whatever) can be very different from the AVERAGE cost (or whatever), which simply divides total costs (or whatever) by the total number of units produced (or whatever). A common finding in MICROECONOMICS is that small incremental changes can matter enormously. In general, thinking 'at the margin' often leads to better economic decision making than thinking about the averages.

ALFRED MARSHALL, the father of NEO-CLASSICAL ECONOMICS, based many of his theories of economic behaviour on marginal rather than average behaviour. For instance, given certain plausible assumptions, a profit-maximising firm will increase production up to the point where marginal revenue equals marginal cost. This is because if marginal revenue exceeded marginal cost, the firm could increase its PROFIT by producing an extra unit of output. Alternatively, if marginal cost exceeded marginal revenue, the firm could increase its profit by producing fewer units of output.

In all walks of life, a basic rule of rational economic decision making is: do something only if the marginal utility you get from it exceeds the marginal cost of doing it.

Market capitalisation

The market value of a company’s SHARES: the quoted share PRICE multiplied by the total number of shares that the company has issued.

Market failure

When a market left to itself does not allocate resources efficiently. Interventionist politicians usually allege market failure to justify their interventions. Economists have identified four main sorts or causes of market failure.

The abuse of MARKET POWER, which can occur whenever a single buyer or seller can exert significant influence over PRICES or OUTPUT (see MONOPOLY and MONOPSONY).

EXTERNALITIES - when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment.

PUBLIC GOODS, such as national defence. How much defence would be provided if it were left to the market?

Where there is incomplete or ASYMMETRIC INFORMATION or uncertainty.

Abuse of market power is best tackled through ANTITRUST policy. Externalities can be reduced through REGULATION, a tax or subsidy, or by using property rights to force the market to take into account the WELFARE of all who are affected by an economic activity. The SUPPLY of public goods can be ensured by compelling everybody to pay for them through the tax system.