Question

Macroeconomic variables are indicators or main signposts signalling the current trends in the economy”, keeping in view this statement what is your understanding of the below key variables of Macro-Economy.                                                                                                       

• Unemployment rates
• Inflation
• Budget deficit

Answer 1

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.

Unemployment rate:

The unemployment rate tells macroeconomists how many people from the available pool of labor (the labor force) are unable to find work. Macroeconomists agree when the economy witnesses growth from period to period, which is indicated in the GDP growth rate, unemployment levels tend to be low. This is because with rising (real) GDP levels, we know the output is higher and, hence, more laborers are needed to keep up with the greater levels of production. Unemployment may be categorized as:

• 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 in labor (skills and mobility), meaning the 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.

Inflation rate:

Inflation is defined as a sustained increase in the general price level of goods and services in an economy over a period of time. Anytime the economy grows so fast it pushes all prices significantly and for a protracted time above the actual utility value of goods and services. Inflation is particularly bad for the economy because it affects everybody and all segments of the economy, distorting prices and undermining the clear relationship that must exist between value and price, the very basis of market exchange.

Inflation is primarily measured in two ways: through the Consumer Price Index (CPI) and the GDP deflator. The CPI gives the current price of a selected basket of goods and services that is updated periodically. The GDP deflator is the ratio of nominal GDP to real GDP. If nominal GDP is higher than real GDP, we can assume the prices of goods and services has been rising. Both the CPI and GDP deflator tend to move in the same direction and differ by less than 1%.

Budget Defcit:

A budget deficit occurs when expenses exceed revenue and indicate the financial health of a country. The government generally uses the term budget deficit when referring to spending rather than businesses or individuals. Accrued deficits form national debt.

One of the primary dangers of a budget deficit is inflation, which is the continuous increase of price levels. In the United States, a budget deficit can cause the Federal Reserve to release more money into the economy, which feeds inflation. Ultimately, a recession will occur, which represents a decline in economic activity that lasts for at least six months. Continued budget deficits can lead to inflationary monetary policies, year after year.

In the early 20th century, few industrialized countries had large fiscal deficits, however, during the First World War deficits grew as governments borrowed heavily and depleted financial reserves to finance the war and their growth. These wartime and growth deficits continued until the 1960s and 1970s when world economic growth rates dropped.