MACROECONOMICS: BASIC CONCEPTS
The concepts involved in macroeconomics focus on three fields, including national output and income, unemployment, and inflation and deflation. These three aspects are central in economic theory. Using these indicators, researchers are able to create macroeconomic models to forecast future economic development.
Having basic knowledge about macroeconomics is essential for a trader to understand the foundations of the economy.
National output and income
The concept of national output and income is one of the central ideas studied in macroeconomics. An economy producing goods and services and selling them always generate income or profit. That is why output and income are inevitably associated and even sometimes defined as one. The best gauge of output and income is the gross domestic product (GDP) and the national account systems (NAS). They measure the total amount of goods and services a country produces in a given period of time. The output and income are one of the best indicators of economic growth. Countries strive to stimulate output and income by using advanced technologies and more efficient production methods, boosting equipment capabilities, attracting more capital and educating human capital. A strong economy means a prospering country and thus a better quality of life for the people in that country.
Unemployment is defined as a situation where someone of working age is not able to get a job but would like to be in full-time employment. The main measure of unemployment is the unemployment rate in the labor force. The labor force is the part of the population who can work. It does not include schoolchildren, retired personnel, and people who are not active job seekers. The jobless rate measures the portion of qualified workers that are unemployed in the labor force. There are various categories of unemployment: classical unemployment (high wages for employees, discouraged employers), frictional unemployment (long time period for employment search), structural unemployment (mismatch of job seekers and available jobs), and cyclical unemployment (stagnant economy).
Inflation and deflation
Inflation and deflation are economic situations where prices of goods and services are high or low. Inflation is a sustained increase in the general consumer price level in an economy over a period of time. The opposite of inflation is deflation. The measure of inflation and deflation is reflected in consumer price indexes. High inflation is caused by the economy growing too quickly, while deflation takes place amid sluggish growth. Being uncontrolled, both these processes can cause instability in a country’s economy. To stabilize it, nations have central banks that employ monetary policies. Interest rates hikes and cuts as well as expansion and narrowing of monetary supply help governments prevent volatile price changes that can trigger negative effects such as uncertainty, reduced savings, social unrest, bankruptcies, and cyclical unemployment. In the next article, we will discuss the models of macroeconomics and its importance in predicting and assessing economic situation.
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