Macroeconomic Variables

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The performance and behavior of the economy can be shown and analyzed by different economic variables and these are known as macroeconomic variables. Thus, macroeconomic variables are indicators or pointers that exhibit the situation and trends of the entire economy or show the pattern of the economic status of a country. Macroeconomic variables are crucial to diagnose the health of every economy as well as to compare one economy with another. An economy is thus accurately checked by observing its different macroeconomic variables. Observation of macroeconomic variables also guides a country to draw a roadmap to become developed from an underdeveloped and developing economy.

The major macroeconomic variables are presented below

Real Sector Macroeconomic Variables

Total Output/Income and Productivity

Total output or total product refers to the market value of all the goods and services produced in a year by a country. The total output of an economy is measured by gross domestic product (GDP). Therefore, the total output of an economy may include GDP, the growth rate of GDP, and national income. The gross domestic product can be measured in nominal as well as in real terms.

Nominal GDP refers to the measurement of output at the current market price or market price of the current year. However, real GDP refers to the measurement of total product at a constant price or the price of the base year.

Productivity, on the other hand, refers to the capacity or ability or effectiveness of productive effort of factor inputs employed in an economy. Therefore, productivity measures the ability of production. The productivity of labor and capital can be measured as;

The productivity of Labor= Total Output/Number of Labors

The productivity of Capital= Total Output/Unit of Capital

Total Consumption, Saving, and Investment

Consumption is the part of income spent on the purchase of goods and services. Consumption is done for deriving mental or physical satisfaction. If the entire amount of income is spent on consumption then there is zero saving. So, saving is the amount of income left after making consumption expenditure on goods and services. Saving is a fundamental aspect of investment as an investment is the use of saving on the purchase of capital goods or purchase of goods that are used in further production or earning income. Therefore, investment is the addition of capital stock/capital goods like plants and pieces of machinery, factories, raw materials, etc. Increase in investment results in the development of a country and living standards of the people.

Aggregate Demand and Aggregate Supply

Aggregate demand refers to the demand made by all the economic agents like households, business firms, government, and foreign sectors. Thus, aggregate demand is the summation of demand made by households, the business sector, government, and the rest of the world sector in an open economy.

AD=C+I+G+(X-M) [In an open economy]

Aggregate supply refers to the quantity of output that all the firms or producers of an economy are willing to supply. It depends on the productivity of factors used in the process of production.

Per Capita Income (PCI)

It is per person income obtained by dividing the national income of a given year by the population of that year. Thus, PCI is defined as the national income divided by the total population of the country at a given time.

Economic Growth Rate

It is the rate at which the real GDP of a country increases over time. It means economic growth rate is the percentage change in the value of all the products produced in an economy during a specific period. Achieving higher economic growth shows better performance of the economy. It depends on several factors including factor productivity.

Employment and Unemployment Rate

Employment can be defined is the availability of opportunity to work for individuals who are able and willing to work at the prevailing wage rate. Having employment opportunities ensures the flow of income and rising living standards of people. The rate of employment is the percentage of the total labor force or the workforce of an economy that is at employment.

Unemployment means a lack of opportunity to work for those who are able and willing to work at the current market wage rate. So, the situation of not having the opportunities to work for the people of the working-age group is known as unemployment. This is one of the major problems of underdeveloped and developing countries. It reduces income and increases wrongdoings in society.

Poverty

It can be defined as the situation of having the inability to satisfy even a basic necessity of life. In modern times, beyond such inability, the definition of poverty includes lack of representation, voice, and excess to public poverty/public goods. Poverty reduces the standard of living and HDI value to fall.

Government Expenditure, Revenue, and Public Borrowing

The expenditure made by the government and its organs in different sectors for the welfare of the public is called government expenditure. Public expenditure is broadly categorized as regular or recurrent expenditure and development or capital expenditure.

Public revenue or government revenue is that the government collects from various sources in one fiscal year. The government collects revenue from different sources like tax and non-tax sources, borrowing, grants, etc. An increase in the income of the government indicates a stronger and efficient nation.

Public or government borrowing is the process in which the state takes a loan from different sources. Public borrowing has been one of the important components to solve the problems of deficit financing in developing and underdeveloped countries. The loan can be taken from internal as well as external sources.

Balance of Trade

The variance between import and export of a country at a given time is known as balance of trade. So, the summary of the total volume of exports and imports of visible goods and services of a country with the rest of the countries in the world is the balance of trade. Visible goods are those which are duly recorded at custom barriers of the country. If the value of exports exceeds the value of imports, it is the favorable or surplus balance of trade and is a healthy indicator of an economy. If the value of export is equal to the value of import, it is the balanced balance of trade. And if the export is less than import, it is known as a deficit or unfavorable or adverse balance of trade.

Trade Cycle/Business Cycle

Trade cycle or business cycle can be defined as the persistent oscillations or fluctuations in the aggregate economic undertakings in an economy. Therefore, the business cycle is the regular upward and downward movement in aggregate economic activities in the economy. It refers to short-run fluxes in the total output, income, employment, savings, investment, consumption, etc. There are different four phases of the business cycle as depression, recovery, prosperity, and recession. The Trade cycle is common in a market-oriented economy.

Monetary Sector Variables

Demand for Money and Supply of Money

The desire of holding cash and financial assets in the form of money/cash/bank deposit for different motives is known as demand for money. According to J.M. Keynes, people do demand money for three motives and they are transaction motive, precautionary motive, and speculative motive.

The money supply is defined as the total quantity of money available in the economy at a given time. Supply of money so refers to the stock of money that is held by the public including coins, currency, and demand deposits. It can be defined in the narrow as well as broader sense. In the narrow sense, money supply includes coins, paper currency, and all the demand deposits and in the broad sense, it includes coins, paper currency, all the demand deposits, and time deposits.

Interest Rate

Interest rate is the cost of capital per unit of time. It is thus the price paid for borrowed capital and return received for lending money. It has a direct impact on policy formulation and implementation. Especially interest rates directly affect investment in the economy. There is an inverse relationship between the interest rate and level of investment as it is the cost of fund/capital. The interest rate can be nominal as well as real. The nominal interest rate is not adjusted for inflation and the interest rate adjusted for inflation is the real interest rate (Real interest rate=Nominal interest rate-inflation).

Price Level/Inflation

The weighted average price of goods and services consumed by consumers is known as price level. The rise in the general price level of goods and services is known as inflation. The fall in the price level over time is called deflation. Consumer price index (CPI), wholesale price index (WPI), retail price index (RPI), etc. are different methods of measuring inflation.

Exchange Rate

The exchange rate is simply the price of the currency. It means it is the rate at which the currency of one country is exchanged with the currency of another country. The exchange rate has a direct impact on exports and imports. Therefore, the exchange rate needs to be stabilized by preventing greater fluctuations on it. It is of two types as fixed or pegged and floating exchange rate.  The pegged exchange rate is a system in which the exchange rate for a currency is kept fixed by the government. Similarly, in a floating or flexible exchange system, the exchange rate is determined by the interaction of demand and supply of the currency.

Balance of Payment (BOP)

Balance of payment is the sum of all transactions that take place between residents of one country and the residents of all foreign countries in the world. It includes the transaction of both visible as well as invisible items. Invisible items are those goods and services which are not recorded in the custom barriers. Balance of payment can be evaluated as

  • Surplus Balance of Payment: Receipt exceeds the payment
  • Balanced Balance of Payment: Receipt equals to payment
  • Deficit Balance of Payment: Payment exceeds receipt
S.NReal Sector VariablesMonetary Sector Variables
1Total Output/Income and Productivity  Demand for Money and Supply of Money
2Total Consumption, Saving, and InvestmentInterest Rate  
3Aggregate Demand and Aggregate SupplyPrice Level/Inflation
4Per Capita Income (PCI)Exchange Rate
5Economic Growth RateBalance of Payment (BOP)
6Employment and Unemployment Rate 
7Poverty 
8Government Expenditure, Revenue, and Public Borrowing 
9Balance of Trade 
10Trade Cycle/Business Cycle 
Macroeconomic Variables

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