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Keynesian’S Explanation Of New Zealand’S Macroeconomic Conditions By Jin Woo Lee

1.0 Introduction

New Zealand’s macroeconomic conditions can be measured and explained by various economic theories.
However, Keynesian’s explanation of a country’s economy to be in the middle ground of laissez faire market and planned economy with a little treat of government intervention seemed best suited to analyse New Zealand’s macro economy.

Furthermore, as New Zealand’s economy may be heading towards possible recession period regardless of record low unemployment rate may be best explained by examining the capacity of New Zealand’s economy. Ability of New Zealand economy to produce goods and services determined by to what extent the capacity is utilized. It is an underlying fundamental for the Keynesian frame work.

In order to evaluate the economic conditions using Keynesian theory, certain economic indicators are chosen to assist the process.
2.0 Theoretical Basis
Keynesian system
Keynes’s uses aggregate demand and supply to find the equilibrium level of real income and output. AD curve is the sum of C+I+G+(X-M) where as C=Consumption I=Investment G=Government Expenditure X=Net Export M=Net Import.
AS curve is the 45 degree straight line expressed in the output and expenditure space. It shows the expected returns that entrepreneurs must receive to cover the cost of producing to be covered. Then at the equilibrium level of AD &AS, determines the output and income level of the economy.
The multiplier (1/(1-Marginal propensity consume) explains how output responds to the exogenous increase in AD.
Principle of diminishing return comes to play when explaining the inflation in Keynesian system. Inflation can be vindicated by as higher the input cost and diminishing productivity of labor gets the output also expands in the system.
Both involuntary and voluntary unemployment can exist as at certain (real) wage people may not be able to find work and some unwilling to work (Peterson and Estenson, 2005).
Investment is balanced with savings via...