Macroeconomics — Understanding the basic concepts
Macroeconomics refers to the branch of economics which studies the broader areas and give a bird eye view of the economy.
Macroeconomics studies the broad scale patterns to determine the progress of an economy, compare two or more economies, and formulate policies for them. Understanding the basics of macroeconomics is crucial from a business stand point as well as personal finance stand point.
Here are some of the basic macroeconomics concepts:
Gross Domestic Product (GDP):
Gross Domestic Product generally referred as ‘GDP’ is the total production of goods and services in a country over a set period. This also includes goods that are exported.
The total amount is generally calculated in dollars and the growth over a period is expressed in percentage. Economists, governments and businesses are always concerned about the GDP. The growth rate determines the progress of an economy.
The GDP calculation on paper seems easy, you just add up all the production, export and subtract all the imports. But, in reality it much more complicated.
There are 2 types of GDP, Nominal GDP and Real GDP. The nominal GDP ignores inflation whereas the real GDP takes factors like inflation in to consideration to arrive at a realistic value.
If GDP is such crucial concept, is there a place where this data is stored or recorded? YES. Every country will have their GDP data hosted on the official portal. But, there is a centralized repository where we can access the important data pertaining to GDP. That source is International Monetary Fund (IMF) and the World Bank.
To know more about the International Monetary Fund (IMF) please click here.
To know more about the World Bank please click here.
For reference, please see below the chart comparing GDP growth rate of India, China, United States as well as the world GDP:
As we can see in addition to show the historic data, the chart also shows estimated growth rate for future. This serve as a benchmark to compare a country’s performance. We can assess whether the economy has surpassed the estimates or underperformed.
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Inflation:
Inflation is the next important concept in line. It refers to the hike in prices due to decreasing value of currency. That is the simplest way of putting it. In the books definitions occupy most of the context.
Why does inflation happen?
Because at the global level foreign exchange the currency rates keep fluctuating. As soon as your currency weakens whatever the country imports become expensive causing a general surge in prices. It is a constant phenomena and developing countries experience high rate of inflation.
Another reason for inflation is increased supply of money in the economy. This huge influx of liquidity causes the value of money to depreciate.
Isn’t it good to have more money in the economy?
Technically, yes it is good to have more money in the economy rather than having less. But, when the influx of money increases it also gives consumers more resources to purchase products. The demand increases but supply of the utilities become scarce and hence sellers need to raise the prices.
Moreover, when there is too much money available the value of currency depreciates and hence on a global level the value of currency weakens against the common denominator (majorly USD). This means whatever the country imports becomes expensive and we receive less value for exports.
So in hindsight, it is not beneficial to have more money in the economy.
How does one get to know the rate of inflation?
It is quite simple to access the inflation rate information. Just like GDP data, inflation data is also hosted on IMF. See below, the comparison of Inflation rates between India, China and United States over the period of time. The picture also suggests expected inflation rates.
Recession:
In theory, recession is just opposite of inflation. In case of recession, there is not enough money in the economy and hence the common public does not have purchasing power.
Moderate inflation is something that a developing economy needs but a slight hint of recession can initiate the domino effect to take down the economy. Hence, governments try to avoid recessions at every cost.
We have seen the global recession in 2008–09 which was a disaster. Before that there were many recession phases mostly near the years of World Wars. Jobs were lost, buying essentials became a Herculean task and every day was spent just to stay alive. That is how significant recession hits.
If having more money in the economy is a problem then having less money is even a bigger problem. Therefore, governments have the reserves, monetary and fiscal policies in place so that artificial influx of money/liquidity can be made to keep the economy afloat.
Unemployment from macroeconomics point of view:
Unemployment is simple to understand. It means there are not enough jobs for the working population in the country. There can be many reasons why unemployment can occur. Reasons like lack of industrial development, scarcity of skilled workforce/ local talent, unavailability of resources, etc.
Unemployment can be a byproduct of various economic adversities or it can be a trigger point to a bigger economic collapse. Whatever may be the case, unemployment is never a good thing for the economy.
The government tries to create more job opportunities by spending the money on public expenditure, new roads, new projects, etc. Having enough jobs for the general public is a sign of a healthy economy.
Macroeconomics in a nutshell
These are some of the basic concepts of macroeconomics. It is just a tip of the iceberg but a good starting point if we want to explore macroeconomics in detail. The subject of economics is a social science, means it has major impact on the society and also on our pockets. Therefore, it is good to have some idea about the basic concepts so that we can realign our personal finances.
