It's been noted that during the height of the Great Recession (GSW) there was a major shift in the macroeconomic approach adopted by most economists. The macroeconomics, which was more than ever viewed as a blunt and crude tool of assessing the performance of the economy – particularly when the business cycle is in a state of flux – has begun to be viewed with much more regard as a source of insight into the real dynamics of the economy.
It was widely recognized that it was very difficult for economic policy makers to discern the signals of economic distress and it was even more difficult for the private sector to make any meaningful headway in improving their circumstances. As a result, the conventional approach to macro-stagflation was abandoned for something a little more subtle. In fact the new macro paradigm adopted by many economists was characterized by a greater emphasis on understanding the role of the business cycle in relation to the global economy in general. This broader approach to macro-stagflation saw the decline in demand for goods and services as the crisis ebbed and flowed, not just as being the result of short-term disturbances caused by the recession, but also as reflecting long term trends in the economy.
There are a number of indicators used by economic analysts to gauge the extent of the decline in demand for certain goods and services in the economy. However, it is only after an economic decline has occurred in the global economy that these indicators begin to be interpreted in terms of their contribution to the deterioration in the economic situation. The importance of understanding how these indicators relate to one another can be best illustrated by the fact that some of them have been known to be able to provide a clearer picture of the overall economic predicament than other indicators.
One of the most important indicators of the crisis is the drop in sales activity. During the GSW there were several industries which experienced a significant drop in their demand for raw materials and products, as a result of which there was a corresponding drop in the availability of these goods on the market. This drop in demand, which is often associated with reduced profit margins due to increased costs, resulted in a drop in the production rate of the goods which were in demand as well.
As a result of this increase in production costs and lower profits the economies of scale which had allowed such increased production had been eliminated and the economy was now experiencing a reduction in the elasticity of demand, which in turn would inevitably lead to a decline in its price level. Since most businesses were still able to withstand the increase in prices, this increase in the supply of goods and services could not only be passed onto consumers but would also cause the price to rise again once production levels began to return to normal. and the economy would be pushed back towards a state of equilibrium.
Micro stagflation can be understood in the same way as macro stagflation in that both types are caused by the failure of economies to adjust to changes in demand as a result of the contraction in supply. Micro stagflation is more of a symptom of the fact that there is a sharp decrease in the production rate of particular goods and services and the prices that are charged . . . . . . for those goods and services. On the other hand, macro stagflation is caused by the failure of economies to respond quickly enough to changes in demand as a result of the increase in supply. It can either be caused by the failure of economies to adjust sufficiently, or it can also occur in response to the contraction of supply that is being caused by the recession.