Macroeconomic variables are indicators or main signposts
signaling the current trends in the economy like all experts, the
government, in order to do a good job of macro-managing the
economy, must study, analyze, and understand the major variables
that determine the current behavior of the macro-economy. So
government must understand the forces of economic growth, why
and when recession or inflation occur, and anticipate these trends,
as well as what mixture of policy will be most suitable for curing
whatever ills the economy.
Following are the different macroeconomic variables which play
the different role in economy.
Economic Output or GDP
Economic output or income is measured in terms of the Gross Domestic Product (GDP). The income
obtained from GDP is measured by adding consumer spending, private investment, and government
spending and net exports. Economic analysts arrive at net exports by subtracting the country's total
imports from its total exports. GDP reflects the total income earned from internal factors of production.
A higher GDP tends to indicate a more economically solvent nation. It is important to note that GDP
calculations take into account the market value of the goods and services produced.
The level of employment is the next crucial macroeconomic variable. The
employment level is often quoted in terms of the unemployment rate. The
unemployment rate itself is defined as the fraction of labor force not working (but
actively seeking employment). Contrary to what one may expect, the labor force
does not consist of all able-bodied persons of working age. Instead, it is defined as
consisting of those working and those not working but seeking work. Thus, it leaves
out people who are not working but also not seeking work—termed by economists
as being "voluntarily" unemployed. For purposes of government macroeconomic
policies, only people who are "involuntarily" unemployed are of primary concern.
For different reasons, it is not possible to bring down the unemployment rate to zero
in the best of circumstances. Realistically, economists normally expect a fraction of
labor force to remain unemployed—this fraction for the U.S. labor market has been
estimated to be 6 percent. The 6 percent unemployment rate is often referred to as
the benchmark unemployment rate. In effect, if the unemployment level is at 6
percent, the economy is considered to be at full employment.
The inflation rate is defined as the rate of change in the price level.
Most economies face positive rates of inflation year after year. The
price level, in turn, is measured by a price index, which measures the
level of prices of goods and services at given time. The number of
items included in a price index varies depending on the objective of
the index. Usually three kinds of price indexes, having particular
advantages and uses are periodically reported by government
sources. The first index is called the consumer price index (CPI),
which measures the average retail prices paid by consumers for goods
and services bought by them. A couple of thousand items, typically
bought by an average household, are included in this index.
THE INTEREST RATE.
The concept of interest rates used by economists is the same as the
one widely used by ordinary people. The interest rate is invariably
quoted in nominal terms—that is, it is not adjusted for inflation. Thus,
the commonly followed interest rate is actually the nominal interest
rate. Nevertheless, there are literally hundreds of nominal interest
rates. Examples include: savings account rate, six-month certificate of
deposit rate, 15-year mortgage rate, variable mortgage rate, 30-year
Treasury bond rate, 10-year General Motors bond rate, and
commercial bank prime lending rate. One can see from these
examples that the nominal interest rate has two key attributes—the
duration of lending/borrowing involved and the identity of the
It is defined as the purchase of new capital goods which add to the stock of capital.
Capital goods are those produced not to satisfy consumer wants directly but for
increasing the level of production in the future. Capital consists of items such as factories,
machinery and railways.
Expected exchange rate changes are determined by interest rate differentials
across countries and risk preemie, while unexpected changes are driven by
innovations to macroeconomic variables, which are amplified by time-varying
market prices of risk. In a model where short rates respond to the output gap and
inflation in each country, I identify macro and monetary policy risk preemie by
specifying no-arbitrage dynamics of each country's term structure of interest
rates and the exchange rate.
Economic growth is a measure of expansion of the economy over time.
How is growth measured?
It is measured over time relative to the performance of the economy over the
exact same period in the immediate past,
THE CONSUMER PRICE INDEX
The CPI is the best barometer of the rate of inflation; it measures the increases in the
price of a typical basket of goods and services the average city dweller would consume.
To capture the consumption pattern of a typical city dweller, it was necessary to change
some items in the typical basket of goods and services; some food and beverage items
and medical care have been replaced by things that reflect our modern communications
age like telephones, computers, and the cost of education.
Increases in the CPI is both indication of increased prices as well as consumers
confidence to spend money as opposed to consumers' fear of pending disaster which
would cause them to safe against an uncertain future.
THE MONEY SUPPLY/THE RATE OF LIQUIDITY
Liquidity is that part of money that can be accessed for immediate
transaction: if you can cash it, it is part of liquidity.
Liquidity rate is the % of total GDP that is liquid.
Monetarists see a link between the liquidity rate and the timing of
recession or boom.
High liquidity, high rate of production.
Low liquidity, low level of production.
Money or to be more precise, the current volume of money or the
liquidity rate has three functions that together control the beat of the
money is the medium of all economic transactions or exchange
money is the store of value over time, the more reliable the better
Money is a commodity that can be traded for its value. Money or the
cost of borrowing it is an important macroeconomic tool for stabilizing