Before the discussion on variables lets take a look what is macroeconomics:
Macroeconomics is a branch of economics that deals with the analysis of the behaviour of the economic system in totality. Thus, macroeconomics studies how the large aggregates such astotal employment, national product or national income of an economy and the general price level are determined. Macroeconomics is therefore a study of aggregates. Besides, macroeconomics explains how the productive capacity and national income of the country increase over time in the long run.
The Origin and Roots of Macroeconomics:
Beginning in late 1929, capitalist economies of the world experienced a severe depression which created a lot of involuntary unemployment and also a sharp fall in their GDP. This depression was caused by drastic decline in private investment. For example, in the United States in 1929, 1.5 million workers were unemployed. After four years in 1933 this unemployment of labour rose to 13 million people out of labour force of 51 million, that is, around 25 per cent of labour force became unemployed. The similar situation prevailed in Britain and other capitalist countries. This depression spurred a great deal of controversy among economists about the causes of this depression and the policies to overcome it and restore full employment. It was at this time that a noted British economist, J.M. Keynes (1883-1946), challenged the view of classical economists who applied microeconomic models to explain depression and involuntary unemployment. By emphasising that the prevailing depression and large-scale involuntary unemployment was due to lack of aggregate effective demand resulting from a fall in private investment he laid the foundation of modern macroeconomics. In his theory he showed that a free market economy was not self-correcting and therefore there was a need for the government to intervene and take appropriate fiscal measures to restore full employment in the economy.
What is Gross Domestic Product (GDP):
Word “Gross” signifies that no deduction has been made for the capital products used in production. “Domestic product” means the good has been produced within the country. So, GDP is the total monetary or market value of all the finished goods and services produced within country.
GDP is calculated on annual basis and it provides estimate of growth rate.
How to calculate GDP
There are three methods for calculation of GDP
- Expenditure method: in expenditure method we calculates spending by the different groups that participate in economy.
GDP = C + G + I + NX
- G=government spending
- NX=net exports
- The production approach: in this method we measures the total value of economic output and deduct the cost of intermediate goods.
- The income approach: in this approach we calculates the income earned by factors of production in an economy including wage paid,rent etc
Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. means inflation as ‘a persistent and appreciable rise in the general level or average of prices’. In other words, inflation is a state of rising prices, but not high prices.
Cause- Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by the additional money creation.
While measuring inflation, we take into account a large number of goods and services used by the people of a country and then calculate average increase in the prices of those goods and services over a period of time. A small rise in prices or a sudden rise in prices is not inflation since they may reflect the short term workings of the market.
Types of inflation:
- Demand pull inflation: Demand-pull inflation is the upward pressure on prices that follows a shortage in supply, a condition that economists describe as “too many dollars chasing too few goods.”
- Cost push inflation: Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. Cost-push inflation is determined by supply-side factors, such as higher wages and higher oil prices
- Hyperinflation is when the prices of goods and services rise more than 50% per month. At that rate, a loaf of bread could cost one amount in the morning and a higher one in the afternoon
- in labor (skills and mobility), meaning the Unemployment, the % of the workforce (in the US people between ages 18-65) out of work because of unavailability of jobs, is made to sound as a crisis because it is (a) personal, and in a money economy, (b) total, that is, short of the 26-week unemployment compensation, and (c) and one of the changes in the market place that is quickly turned into political opposition to government–the unemployed is an angry uncertain voter.
- Thus unemployment frightens politicians, while macro-economists and political economists are mainly worried about inflation
- Seasonal unemployment is tired to seasonal occupations, and not a major concern for the economy except for those seasonal workers whose pay is too little to save up against the expected unemployment season.
- Cyclical unemployment is part and parcel of a money economy, and is brought on by speculation of profits and bursts in business.
- Frictional unemployment is another name for labor turnover, when new workers enter the workforce as old ones retire or die and when workers change jobs.
- Economists look favorably on a high rate of frictional unemployment as indication the economy is strong enough to give workers confidence to seek to match their skills to higher paying jobs, an indication of a healthy economy.
- Structural unemployment caused by a lag between change in production and change economy becomes rigid, unable to respond to both market as well as policy incentives to change course-the lost of fine tuning ability.
- Structural unemployment tends to be regional, and industry and racially-specific, not across the board, as a result, aggregate policy measures (policy incentives directed at the economy as a whole) is not very effective in removing pockets of structural unemployment.
an interest rate is rate charged by a lender of money or credit to a borrower. short, from the borrower’s point of view it is the ‘cost’ of borrowing, and from the lender’s point of view it is the reward for lending. Or, to put it into an even simpler way, the rate of interest is the price of money. The annual interest rate is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are usually annualized.
Interest rates vary according to:
- the government’s directives to the central bank to accomplish the government’s goals
- the currency of the principal sum lent or borrowed
- the term to maturity of the investment
- the perceived default probability of the borrower
- supply and demand in the market
- the amount of collateral
- special features like call provisions
- reserve requirements
- compensating balance
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