Macroeconomic variables Assignment
Download as DOC, PDF3 likes6,862 views
This document discusses several key macroeconomic variables that governments must understand in order to effectively manage the economy, including: - Gross Domestic Product (GDP), which measures total economic output and income. A higher GDP indicates a more economically solvent nation. - The unemployment rate, which is the percentage of the labor force that is unemployed but seeking work. An unemployment rate of around 6% is considered full employment. - The inflation rate, which is the rate of change in the overall price level, typically measured by price indexes like the Consumer Price Index (CPI). - Interest rates, which can refer to hundreds of different nominal rates across different durations and borrower types. - Investment,
Macroeconomic variables Assignment
- 1. Macroeconomic Variables 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. UNEMPLOYMENT. 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
- 2. 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. INFLATION RATE. 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
- 3. duration of lending/borrowing involved and the identity of the borrower. Investment! 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. Exchange rate 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. GROWTH 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.
- 4. • 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 economy: 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 the economy.