Economic Variables

A variable is a term which defines the greatness of a measurable value. An economic variable is a measurable parameter which helps in defining the performance of an economy whose role is to determine the functionality of the economy[1]. An economic variable may also be defined as any data that is accounted for in an economy. For examples, an economic variable may be the employment rate, inflation, Gross Domestic Product (GDP), available resources, liquidity, etc. Economic variableness is the measure of the variables in a functioning economy.

Economic variables may be classified as microeconomic variables or macroeconomic variables. Microeconomic variables are economic parameters which measure individual or smaller economic units such as companies and individual firms. They include variables such as liquidity, return on investment, growth, and return on assets, size, age and leverage. On the other hand macroeconomic variables are used when analyzing the economic status of a nation as a whole or a large economic unit such as a region or the world. Examples of macroeconomic variables include data on proprietary activities, consumer expenditure, employment rates, inflation, GDP (economic output) government finances and CAD- Current Account Deficit. This paper focuses on macroeconomic variables.

Economic Output

Economic output is a measure of the Gross Domestic Product (GDP). Gross domestic product indicates the total quantity of goods produced in a country within a specified time period, normally one year. The figures of GDP may be released by the relevant authorities quarterly or annually. A high GDP indicates a powerful economy that is economically solvent while a low GDP indicates a weak and dwindling economy. In order to measure GDP, economic analysts add consumer expenditure, net exports, private investment and government spending. The net exports are obtained by subtracting the total imports from the total exports in the same period of time. When calculating GDP, analysts must consider the existing market value of the goods produced.

Unemployment Rate

Employment and unemployment rates are also major macroeconomic variables which affect the economy of a county. Employment or unemployment affects political elections. Unemployment results from reduction in business production which is brought about by economic recession. Unemployment rates decline when the economy grows. In case the economy grows too fast, shortages of some products lead to higher prices.  Unemployment is calculated as the percentage of the working population that is jobless at a given time. The working population includes all people who are in their productive years; not too young and not too old. However, the percentage involves active job seekers only. People who are unemployed and not actively looking for jobs are referred to as voluntarily unemployed and are therefore left out. It is not possible to have zero unemployment rates in any country. Governments set ideal unemployment rates below which the economy is considered fully employed. A low unemployment rate indicates that the economy is doing well while the converse is true.

Inflation Rate

The inflation rate is a measure of the average level of prices on the basis of a price index. For example, in the United States of America, the most commonly used index is the consumer price index (CPI). The index measures the regular prices that customers pay when buying goods and services from retailers. Inflation is said to be prevalent when the consumer price index increases. When the average prices of commodities rise, consumer expenditure decreases leading to a lower GDP. Rapid increase in inflation rates signals a poor macroeconomic health.

Interest Rate

Interest rate is the cost of borrowing money and it reflects the risk a country faces in case it borrows money. In macroeconomic terms, interest rate is referred to as the nominal rate which is normally not adjusted for inflation. In the US, the most commonly known interest rates are those of cars. New cars, used cars and mortgages. When the interest rates are low, consumers are stimulated to spend money. For instance, if the housing market gets excess inventory and low uptake of houses, lenders in the sector may reduce mortgage interest rates to increase demand for mortgage loans. Central banks regulate interest rates for other banks and financial institutions. When the supply of money is high, the interest rates reduce while the interest rates increase when the supply reduces.

Conclusion

There are many economic variables which shape the economy of a country. The scopes of the variables differentiate microeconomic and macroeconomic variables. Microeconomic deals with individual level while the macroeconomic accounts for the entire country. In conclusion, various macroeconomic variables affect the economy differently. Each variable affects one or multiple areas of the economy. Each factor has a complex relationship with other factors.

Bibliography

Hubbard, R. Glenn, and Anthony P O’Brien. Essentials of Economics, Global Edition. Harlow, United Kingdom: Pearson Education Limited, 2015.

[1] R. Glenn Hubbard and Anthony P O’Brien, Essentials of Economics, Global Edition (Harlow, United Kingdom: Pearson Education Limited, 2015).