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Macroeconomics is a field in economics whose main area of study is the behavior of the collective economy. Its area of examination is wider and larger in phenomena. It is concerned with the growth rates, inflation, variations in employment, income and price changes. The term principle of macroeconomics was used to refer to the idea of the way the economy functions or how it should work. More specifically, the main objective of these principles is the maximization of income in a country, assisting in the growth of the economy while still raising the standards of living. While there exists variations on these principles there are other secondary objectives applicable to all countries.
Despite its globalization, Canada has been faced with several economic challenges like inflation, price variations and high levels of unemployment. However several macroeconomics statistics have revealed that its economy has also grown. It is therefore worthy to investigate whether the principles of macroeconomics have played a role in a country that has ranked high in several areas of macroeconomics.
Mankiw is well known for his ten principles of macro economics which we will critically look at and their relevance to the Canadian economy. He classifies the ten principles according to the way the economy functions as a whole, the interaction of people and how they make decisions. In his first principle Mankiw asserts that people are often faced with trade offs. These trade offs are in regard to efficiency and equality. Efficiency is the ability of the country to maximize on their resources even when they are scarce and equality will be their ability to uniformly distribute the benefits to the members of the society. In the second principle Mankiw refers to the price of something as what you give in order to get it. Since people often encounter trade offs it becomes necessary to compare costs between something before taking any action. The problem in this principle arises when people realize that the benefit may not be worth its cost (Mankiw, 2000 p. 4).
In the third principle, Mankiw asserts that rational human beings focus on the marginal cost. Before making any decisions it is necessary to compare marginal benefits with the cost to determine the decisions you are going g to take. He further asserts that economists have the tendency of assuming that all human being are rational whereas this is not always the case. In Canada firms and industries take great precaution while hiring their workers and settling on the amount of a product to manufacture. As a result the industries have maximized on the profits and led to tremendous, improvement in the economy. The international indicators have pointed that trade in Canada has resulted in more development and financial growth.
People often tend to react to incentives. This reward and punishment principle show how people respond to the changes in the market. When the price of something goes up people tend to buy less of the commodity but people often buy more of the same when the price reduces. In Canada the makers of public policies have resulted to using more incentives to draw and attract more consumers. They have realized that when the benefits or the costs are altered with so does the behavior of the people. For example Saab United a motor vehicle selling company in Canada started an incentive program that allowed customers to purchase their products at lower prices attracting numerous clients.
The second cluster of principles was classified in regard to how humans interact. The first principle in this cluster was in regard to the ability of trade to improve a country holistically. In fact this principle insists that trade must not be seen as a form of competition among countries but rather when two countries unite together to trade they both benefit from the activity. Trade unlike other partnerships allows a country to specialize in what they are best in bringing in a lot of profits as well as foreign investment. Canada for example is well known for its trade relations with other countries. Recently the 50th anniversary was celebrated as they marked fifty years of diplomatic relations with Panama. Attended by their minister of foreign affairs, this convention marked Canada’s commitment to the world of trade.
In all economic activities, markets often stand out as a good way of organizing the activity. This principle acknowledges that only the market is capable of rewarding in accordance with what others are want to pay for the same. Consequently when the market is defined through politics in the government, unequal distribution may arise and these policies simply result to rewarding those in power rather than the people. However Canada boasts of very informed leaders who are able to make properly informed decisions and this has improved the market, even though recently the leaders have been put on the spot.
In the same way, the government is entitled to improving the outcome of the markets. More often than not the markets are unsuccessful while allocating the resources and this principle states that the government is responsible for correcting this mistake. Often this is done through making a public policy that rectifies this problem. Thus the government should always be in check to ensure that the right decisions are made in the market. Such policies can include regulations against pollution. For instance the government of Canada has ensured that they have made regulations to discourage monopoly in the county.
The third cluster of principles is in regard to the functioning of a country’s economy. The sub principle in this cluster justifies the standard of living of a country to its ability to create goods and services. There have been fluctuations and variations in standards of living in different countries with Africa ranking high with very low standards of living. These variations however can be attributed to the level of productivity in these countries that referring to the goods and services produced for each labor input unit. Countries that produce more labor with time happen to have more income as compared to the countries that produce less. This results in higher standards of living and their growth rate also increases. Canada is among the top ten countries ranked with very high standards of living. Over the past two decades the business sector has increased in productivity resulting in very high standards of living. This tremendous growth has been attributed to the increase in productivity and in particular the labor productivity per every worker.
Printing money in many African countries have resulted in inflation. Mankiw’s principle argues that it is very evident that when a country results to printing of more money, it is the value of the money that reduces translating to inflation. Many countries have resulted to printing of money only as a short term tool in avoiding an economic depression. In 2009, the Bank of Canada nearly resulted to printing money to solve the economic crisis that had engulfed the country. On second thought however the bank’s CEO discovered that this move would have led to inflation like it had done with their US and French counterparts. This indeed would just be a short term solution to the problem.
Finally Mankiw summarized his last principle as the trade off society faces between unemployment and inflation. While trying to fight inflation, the level of unemployment rises though temporarily. Basically when more money is brought into the economy, people tend to spend more compared to before forcing the markets to increase the prices. While doing so they are still forced to increase the labor leading them to hiring more workers. As a result the level of unemployment may decrease thus justifying the increase as just temporary. More recently however, Canada has been through a period of inflation with its citizens fearing that they could be headed for a deflation. The country has continued to up the interest rates in order to keep up with this inflation. The government has therefore failed in formulating policies that are relevant to the market.
While Mankiw’s principle equips us with a wealth of knowledge on the macroeconomic principles, it is wise to chip in another economist’s principle. Gotheil is also widely known for his principles. In his principle of economy, he asserts that this should be the main application to situations with scare resources. He argues that the focus here should to minimize the cost with the desired goal. Whenever we are faced with minimal resources, do not at any cost waste the resources. Canada for example is the among the largest as well as independent producer of crude oil and gas. The natural resource has encouraged not just trade in the country but also foreign investment (Gotheil, 2002 p 8).
It should be noted that the main goal of these principles if applied to a country is to increase the sustainability of its people and reduce inflation. The main goal of this approach is to increase the level of employment as well as encouraging the minimization of constraints such as costs and budget. In Canada some of these principles have been properly applied as explained by the economic growth though a lot still needs to be done in order to work on the country’s increasing inflation.
