The fundamentals of macroeconomics
Throughout this article, I aim to explain the basics of macroeconomics so that you can better understand this intriguing topic.
Firstly, the government has four main macroeconomic objectives: economic growth, maintaining stable prices, achieving full employment, and maintaining a balance of payments.
Economic growth is as it sounds; it is the amount by which the economy grows each year. We measure economic growth quarterly (four times a year), and it is defined as the percentage change in GDP from one quarter to another. GDP stands for Gross Domestic Product, and it can be calculated in numerous ways, but the most common method is to calculate the total value of all goods produced in the economy.
Maintaining stable prices primarily refers to not letting inflation get out of control. Inflation is the average change in price levels of goods/services, and it is measured monthly. Inflation is most often calculated using CPI – Consumer Price Index. CPI is measured by first sending out a survey to a stratified sample of households, asking what goods/services they spend money on and the percentage of their income it takes up. Using this data, the government would then create a ‘basket’ of goods with a weighting of products. The government would then send out individuals to track the price changes in different regions of the country. At the end of the month, they would form an average price change for each product and then calculate an average inflation rate.
The next objective is maintaining full employment. The unemployment rate is the number of workers who do not have a job compared to the number of workers in the labour force. The labour force is effectively the number of people who are willing and able to work in the economy. This does not include those currently in full-time education or those who are now retired. Therefore when we hear the statistic, ‘the economy has 4% unemployment, they mean 4% of the people in the labour force are unemployed rather than 4% of the entire population. There are two main methods to calculate the unemployment rate: the Claimant Count and the ILO Labour Force Survey. The Claimant Count involves counting the number of individuals on unemployment benefits and comparing that to everyone paying taxes and claiming benefits to get the unemployment figure. The ILO survey is carried out by taking a stratified sample of the population and asking them whether they can start work and if they have been actively seeking it. The difference here is that the ILO also accounts for individuals who may not claim benefits and for those who are seeking part-time employment.
Finally, the last is maintaining a balance of payments – this will be kept very simple to avoid confusion. There are three components, but to understand it, we will focus on one – the current account. The current account takes the most significant proportion of the entire balance of payments, and most of the current account is composed of the balance of trade. This is the value of exports from the economy minus the value of imports. Ideally, you would want this in a balance or surplus to prevent money from leaking out of the economy; however, a government may not prioritise it that much in some situations. Of course, this is all a simplified version of these objectives to make reading this article easy. In my next article, I will elaborate on the tools that governments use to influence these objectives