The Relationship between Micro and Macroeconomic Performances

The Relationship between Micro and Macroeconomic Performances

The Relationship between Micro and Macroeconomic Performances

Microeconomics entails the study of business and individual decisions, while macroeconomics deals with aggregate economic variables. One microeconomic element that affects macroeconomic performance is inflation. Taylor (2008) defined inflation are the continuous rise in the general price levels of essential commodities in the economy. Inflationary pressure directly affects the purchasing powers of the consumers. This is because it leads to a fall in the value of money, hence a decline in their purchasing ability. During inflation, excess money is available for the purchase of a few goods and services in the market, thus, resulting in a price increase (Sykes, 2004). Under such circumstance, most goods become unaffordable to low and medium income earners. Consequently, their consumption patterns get interrupted; forcing them to forgo most of their basic needs. The net impact of inflationary pressure goes beyond the micro levels.

During inflation, the aggregate demand for goods and services significantly falls as consumers can only afford relatively fewer items compared to the base year. The value of money drops, making it worthless. This directly affects macroeconomic elements such as growth, development, and the rate of employment. Duarte and Gilberto (2012) explained that inflation is detrimental to economic prosperity since it drives away potential investors and increases the cost of doing businesses. In addition, it is often associated with high-interest rates and high cost of capital. At higher interest rates, capital goods and resources are very costly to a majority of potential investors who rely on borrowed funds to finance their day-to-day operations. As a result, risk-averse investors shy away from undertaking development projects in inflation hit economies.

Price changes directly impact on labor productivity. Banting, Sharpe, and St-Hilaire (2011) observed that an increase in nominal wages accompanied by an upward trend in the price levels lowers labor productivity. This is because any increase in t.............