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ABILITY-TO-PAY PRINCIPLE: A principle of taxation in which taxes are based on the income or resource-ownership ability of people to pay the tax. The income tax collected by our friends at the Internal Revenue Service is one of the most common taxes that seeks to abide by the ability-to-pay principle. In theory, the income tax system is set up such that people with greater incomes pay more taxes. Proportional and progressive taxes follow this ability-to-pay principle, while regressive taxes, such as sales taxes and Social Security taxes, don't.

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MACROECONOMIC PROBLEMS:

Undesirable situations that exist in the macroeconomy, largely because one or more of the macroeconomic goals are not satisfactorily attained. The primary problems are unemployment, inflation, and stagnant growth. Macroeconomic theories are designed to explain why these problems emerge and to recommend corrective policies.
Macroeconomic problems arise when the macroeconomy does not satisfactorily achieve the goals of full employment, stability, and economic growth. Unemployment results when the goal of full employment is not achieved. Inflation exists when the economy falls short of the stability goal. These problems are caused by too little or too much demand for gross production. Unemployment results from too little demand and inflation emerges with too much demand. Stagnant growth means the economy is not adequately attaining the economic growth goal. Each of these situations is problematic because society is less well off than it would be by reaching the goals.

Unemployment

Unemployment arises when factors of production that are willing and able to produce goods and services are not actively engaged in production. Unemployment means the economy is not attaining the macroeconomic goal of full employment.

While attention is usually focused on the unemployment of labor, such as the time Pollyanna Pumpernickel was laid off from her job at the OmniMotors Car Company, any of the four factors of production can suffer unemployment. For example, 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.

Unemployment is a problem because:

  • Less output is produced and thus the economy is less able to address the scarcity problem.

  • The owners of unemployed resources receive less income and thus have lower living standards.

Inflation

Inflation arises when the average price level in the economy consistently and persistently increases. In other words, prices generally rise from month to month and year to year. With inflation the economy is not attaining the stability goal.

Inflation is an average increase in prices, with some prices rising more than the average, some rising less, and some even declining. As such, not every member of society is likely to experience exactly the same inflation.

Inflation is a problem because:

  • The purchasing power of financial assets such as money declines, which reduces financial wealth and lowers living standards.

  • Greater uncertainty surrounds long-run planning, especially the purchase of durable goods and capital goods.

  • Income and wealth can be haphazardly redistributed among sectors of the economy and among resource owners.

The Business Cycle

Unemployment and inflation tend to vary with business-cycle instability. At some times, unemployment is less of a problem and inflation is more. At other times, unemployment is more of a problem and inflation is less. Consider how these two problems connect to the two primary phases of the business cycle.
  • Contraction: The contraction phase of a business cycle is characterized by a general decline in economic activity. Aggregate demand is less, meaning less output is produced, and thus fewer resources are employed. For this reason, unemployment tends to be a key problem. However, because markets are more likely to have surpluses than shortages, inflation tends to be less of a problem.

  • Expansion: The expansion phase of a business cycle is characterized by a general rise in economic activity. Aggregate demand is higher, production is greater, and more resources are employed. Demand for production often outpaces the ability to supply the production. Under these circumstances, because markets are more likely to have shortages than surpluses, inflation tends to be the primary problem. However, with robust production and jobs aplenty, 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. 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. Stagnant growth exists if total production does not keep pace. This means the macroeconomic goal of economic growth is not attained.

Reasons for stagnant growth can be identified with a closer look at the quantity and quality of the resources used for production.

  • Quantity: The available quantities of the four factors of production--labor, capital, land, and entrepreneurship--can restrict the growth of production.

    The quantity of labor is based on both the overall population and the portion of the population willing and able to work. Should either decline, then growth is not likely to keep pace with expectations. If, for example, Edgar Millbottom decides to quit his job and spend his time doing nothing but vegetating on his parents living room sofa, then the total quantity of labor declines.

    The quantity of capital depends on the amount of investment expenditures relative to the depreciation of the existing capital stock. If investment expenditures should decline or depreciation increase, then the economy is less likely to grow. If, for example, restrictive government regulations and high taxes discourage The Wacky Willy Company and similar manufacturing companies from building new factories, then the total quantity of capital declines.


  • Quality: The quality of the four resources can also lead to stagnant growth. The two most noted resource quality influences are technology and education. The lack of technological progress, which could result from allocating fewer resources to scientific research can limit increases in the quantity of resources. Along a similar line of reasoning, allocating fewer resources to education can also limit resource quality.

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Recommended Citation:

MACROECONOMIC PROBLEMS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 24, 2014].


Check Out These Related Terms...

     | unemployment | inflation | macroeconomic sectors | macroeconomic markets | macroeconomic theories |


Or For A Little Background...

     | macroeconomics | macroeconomic goals | full employment | business cycles | business cycle phases | stability | economic growth | factors of production |


And For Further Study...

     | contraction | expansion | potential real gross domestic product | shortage | surplus | circular flow | economic growth, sources | economic growth, production possibilities | investment, production possibilities | unemployment, production possibilities | full employment, production possibilities | technology |


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