Economic analysis is similar to other observational and analytical sciences. Thus, it is possible to fall victim to pitfalls of faulty economic analysis, or a faulty analysis process.
(a)Stating that raising taxes always increases government revenue is a faulty thought process in economic analysis. Though the two events might be related, it is not always a fact. Government revenue might increase for other reasons. This thought process commits the association-is-causation fallacy. In other words, it is incorrect to assume that one variable, raising taxes, necessarily results in the other variable, increased government revenue.(b)The idea that increasing imports will bring an economy out of a recession is certainly a faulty analytical process. Not only does it commit the association-is-causation fallacy mentioned above, it also ignores secondary, or unintended, consequences. For example, increasing imports will simply send more money abroad and increase government deficits even further. When making any decision, it is important to recognize the full impact that certain policy changes may have on an economy.
An article outlines the differing aspects between three countries experiencing low rates of inflation. In short, the United States, Europe, and Japan are experiencing rates of inflation at approximately 1%. However, this stems from different reasons with different implications. For example, deflation may stem from low levels of demand and policies that limit growth, as is occurring in Japan. Europe is attempting to reverse the downward price and wage pressures with stimulating monetary policy, though the effects are short-term and insufficient. These pressures are stemming from previously excessive economic processes. However, the United States seems to be experiencing near-deflation price levels for other reasons. Primarily, technological advancement has decreased production costs and also increased online competition. With this, unemployment is decreasing and personal income is increasing at a rate faster than the inflation rate. Thus, low rates of increasing price levels need not always be an alarm of concern.
This topic is of particular macroeconomic concern because it is influenced by and influences the whole economy. Inflationary pressures result from various different interactions in a country's economy. The result is a higher price level throughout the country, thus increasing the demand for money, overall demand, and many other factors.
Microeconomics relates to macroeconomics:
Microeconomics studies the individual behavior of various economic decision makers, whereas macroeconomics studies the economy at an aggregate level.
Microeconomics examines the demand and supply of an individual product, whereas macroeconomics studies it at an aggregate level as it deals with the GDP (gross domestic product) and trade of an economy.
Microeconomics examines the price level of an individual product, whereas macroeconomics deals with rate of inflation, that is an aggregate price level, of all individual products.
Microeconomics deals with the demand and supply of labor of individual industries, whereas macroeconomics deals with the labor market at an aggregate level, which studies the unemployment rate of an economy.
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