Question

Many economic variables are classified according to their relation to the business cycle. What are the principal categories? Variables in which category(ies) are of greatest help in forecasting changes in the economy?

Answer 1

Basic Economic Variables:- There are 4 basic economic variables-

1. Balance of payments.

2. Inflation.

3. Economic Growth.

4. Unemployment.

1. Balance of payments relation with the business cycle:- The balance of payments is the record of all economic transitions between the residents of the country and the rest of the world in a particular period of time. The sum of all transactions recorded in the balance of payments should be zero. The business cycle creates imbalance in balance of payments through exchange rate fluctuations, payment imbalances.

2. Inflation’s relation with the business cycle:- During the business cycle, unemployment increases and this create recessions. In the bottom of the recession period, unemployment is at its highest and inflation is low. The stage of the business cycle does not affect the inflation rate, it will depend on monetary policy affects the growth of the stock of money.

3. Economic Growth relation with the business cycle:- There is a deep relation between the economic growth and business cycle. The business cycle affect the economic growth.

4. Unemployment relation with the business cycle:- The business cycle increase the unemployment rate in the economy.

Principal Categories:- The category of financial liability at fair value are

1. Profit.

2. Loss.

Balance of payment inflation and economic growth are of greatest help in forecasting changes in the economy.