It might seem like a dry subject, but think of macroeconomics somewhat like family dynamics: A grandparent who built a legacy, a brother who hordes money away for hard times (and good times) and an aunt who involves herself in the family's financial matters and attempts to create order. Likewise, the macroeconomy is an aggregate picture of an entire economic environment, such as the economy of a country. It includes data on proprietary activities, including consumer spending and the hiring rates of employees by private sector businesses. Compiling this data into averages and analyzing them helps determine the economy's overall financial health. There are several key variables in a macroeconomic analysis.
The key macroeconomic variables are gross domestic product (GDP), the unemployment rate, inflation and interest rates.
Measuring Economic Output
Economic output or income is measured in terms of the gross domestic product (GDP), which is basically the combined earnings from a year's worth of goods and services produced by a country. A higher rate tends to indicate a more economically solvent nation. Analysts measure GDP income by adding consumer spending, private investment, government spending and net exports. They calculate net exports by subtracting total imports from total exports. GDP reflects the total income earned from internal factors of production. It is also important to note that GDP calculations take into account the market value of the goods and services produced.
Tracking the Unemployment Rate
Who hasn't experienced work cutbacks or job loss (or the need to cut loose and hike across Europe with barely more than a backpack and tent?) The unemployment rate is the percentage of the working population that is not currently employed. The percentage only takes into account the number of people who are actively seeking employment. Those who are unemployed and not seeking jobs are "voluntarily" unemployed. Many governments set benchmark unemployment rates since they are aware that a zero rate is next to impossible. If the actual aggregate unemployment rate is at or below the benchmark rate, the economy is considered to be fully employed.
Watching the Inflation Rate
The inflation rate is often thought of as the macroeconomic Bad Guy, but really, it's can be used to measure changes in the average price level based on a price index. The most commonly known index in the United States is the consumer price index (CPI). This index measures average retail prices that consumers pay. A high or increasing CPI indicates the existence of inflation. Higher prices tend to reduce overall consumer spending, which in turn leads to a decrease in GDP. While inflation itself is not always negative, rapidly increasing rates of inflation signal the possibility of poor macroeconomic health.
Monitoring the Interest Rate
Key macroeconomic variables include interest rates, which are a reflection of the risk of borrowing (not unlike the emotional price you might pay when borrowing cash from a family member). In terms of macroeconomic reporting, the interest rate is the nominal rate. Nominal rates are not adjusted for inflation. Some of the more widely known interest rates are those for a new car loan, a used car loan, a 15- or 30-year fixed mortgage and the treasury bond rate. Lower interest rates typically occur when there is a need to stimulate consumer spending. For example, if the housing market has an excess of inventory and a decline in the number of buyers, lenders might reduce mortgage interest rates to stimulate demand.
To summarize, macroeconomics is a delicate juggling of measurements, calculations, compromise and cooperation, not unlike family dynamics where balance creates harmony and success.