Macroeconomic Indicators – Business Integrals

Economic Indicators

The indicators of economic performance give us a way to assess how an economy is performing. They are explored in turn below.

1. Gross Domestic Product - GDP

Nominal GDP	Unadjusted for price
Real GDP	Adjusted for inflation

Ways of calculating GDP:
GDP(P):	Production/value added at each step – Revenue less cost
GDP(E):	Expenditure by Households, Firms, Governments and Foreign Sector Y = C + I + G + NX
GDP(I)	Income Payments to Factors of Production – Capital and Labour
Other measures
GDP	Based on nation – includes foreigners, excludes residents overseas
GNP	Based on people – includes residents overseas, excludes foreigners
GNI	Based on payment flows – includes money spent in the country/repatriated

2. Inflation

Inflation is the rate of change of the price of goods.

It is measured as change in CPI.

CPI = cost of goods in current year / cost of goods in base year

Inflation results from price levels rising disproportionately to quantity. See the long-run average supply in the long-run business cycle section below.

3. Unemployment

Types of unemployment

Frictional	People trying to find new jobs
Structural	Skills mismatch
Cyclical	Following the economy

Wages and employment are determined by the supply and demand for labour in a given industry.
An industry with high supply and low demand will have lower wages.

4. Interest Rates

Real Interest Rate	Reflects the real, economic cost of borrowing and return to lenders
Nominal Interest Rate (advertised rate)	Incorporates compensation for expected erosion of value due to inflation. The bank needs to pay or receive a greater rate when inflation is high.

Central Bank Regulation of Interest Rates:

Central Bank tries to keep the real interest rate (r) constant by controlling the nominal interest rate (i) in response to inflation (π)

If (π) increases, central bank increases (i) so as to not erode (r)
If (π) decreases, central bank reduces (i) so that (r) doesn’t increase (this would increase saving)

5. Exchange Rates

Calculating the Exchange Rate

The nominal exchange rate is the price of foreign currency over the base currency.
The base currency is taken to be 1, so the exchange rate tells you how many units of the foreign currency can be bought by one unit of domestic currency.
Appreciation is where one unit of base currency buys more of foreign currency. E.g. USD/AUD going from 0.7 to 0.8 means the AUD is getting stronger.

Currency markets are subject to demand and supply forces and influenced by:

Interest rates (higher creates more demand)
Favourabilty of investment opportunities
Speculation (if investors expect a currency to depreciate, they will sell it) and it’s value will reduce

Types of Indicators

Leading	Observed before economic activity, often reflects expectations (e.g. optimism)	Consumer confidence, housing approvals
Coincident	Observed at same time	GDP/ income
Lagging	Observed after economic activity, often firms take time to respond	Unemployment