The Impact of Macroeconomic Variables

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Table of Contents

Introduction
Consumer price index (CPI)
Interest rate
Money supply
Unemployment
Conclusion
Works Cited

Introduction

Macroeconomics is a branch of economics that looks at how the economy of a country performs (Gwartney 3). According to McEachern (187), it considers factors such as inflations, unemployment and employment issues, a country’s trade with others and to a further extend the success and failures of a government’s economic policies.

All these and other more unmentioned variables always have an impact on a county’s economic performances. A case study of the UK and US will be used to illustrate how these variables have an impact on the real exchange markets

Consumer price index (CPI)

According to Consumer Price Index (CPA) can be used as a direct measure of people’s living standards which is based on the total cost of goods and services relative to the same amount of goods and services in a base year. It is always the percentage change from the base year. By considering a large pool of goods and services, CPI can obtain a relative measure of the standards of living in the country (Turvey 33).

Prior to financial crisis, most of the residential and commercial premises in UK and US were run by local investors for a long period of years (Dijkman 23). The impact of CPI is hypothesized to be negative because, in the years 2000, 2001 due to need for money, these premises were sold to foreigners at a higher price (Frumkin 315).

This led the market into a standstill position due to the fact that the potential sellers were not ready to trade with the local investors. Consequently, the locals did not involve in any investment as they waited for the prices to lower.

Due to the inflations experienced in the markets over the last recent years, especially with the basic commodities such as food crops and cash crops, oil and others, real market exchange has been affected leading to a very unbalanced living condition more so with the countries previously known to be the supper powers such as the US and UK (Free 354).

Deflation rates has continued to be experienced in UK discouraging consumer spending and investments.

Interest rate

Gottfried (196) defines interest rate as the fraction of the total amount of money charged for its use. It can either be fixed or flexible depending on the amount. Banks are highly known for offering loans which are expected back after a given grace period. Usually the borrower doesn’t return the same amount as borrowed; he returns it with a profit that is cumulatively relative to the grace period e.g. a month or a year.

Before the financial crisis, the two countries invested heavily on such kind of business which bore many profits. Compared to pre-crisis era, credit conditions have continuously tightened, world economy has experienced a downturn much more with the inflation rates, and this has led to inventions of policies that allow the reduction of interest rates so as to continue in the market place (Kolb 25).

The impact of interest rate is hypothesized to be negative because there has been fear of engaging in such investments that involve lots of cash.After recesion, interest’s rates in the US and UK was quickly and sharply cut down leading to a reduction in the made by banks.

Money supply

According to Owen and Clark (185), money supply is the total amount of money both coins and banknotes that is available at a particular time that is used in buying goods and services. It is the money in circulation. Two supply measures are use by the federal the Federal Reserve; M1 and M2.Money supply is usually inversely proportional to interest rate where by the interest rate increases with decrease in money supply and vice versa.

When there is a lot of money or very little in supply, a country’s economy is negatively affected (Owen & Clark 185). Therefore, a balance in the market is achieved when a balanced is reached between the money in demand, money in supply and the rate of interest.

Before the crisis, business were carried on well and there were no pronounced inflation levels, more banking business were transacted and this meant that there was enough money in supply to meet the demand. With the experience of the crisis, less banking was done leading to less money to lend the real sector. There was a lot of borrowed money in terms of assets in the US before the crisis.

For a government to offset such deficits, it prints a lot of money which eventually becomes valueless leading to the collapse of fixed rate of exchange in the regime. The impact is hypothesized to be negative in that in both UK and US,money supply has increased, a state that can be balanced by increased inflation.This balance is so far not reached.

Unemployment

Rate of unemployment; currently, the number of unemployed is alarming and it continues to be on the rise. According to Organization for Economic Cooperation and Development [hereafter referred to as OECD], this is due to money factors such as population growth and world’s economy downturn (OECD 274).

Before the crisis, many people had well paying jobs because the economy was stable and this meant that a lot of money was collected in terms of taxes. With the salaries there was enough to venture into the business thus positively contributing to the country’s economy.

After the financial crisis, many people were retrenched and those who were jobless didn’t have a chance because the governments did not have enough money to pay its employees.

OECD is of the opinion that, if many people are not employed then it means that the amount of money that should be given to the government in form of revenue, for its smooth running will not be available; this strains a county’s economy greatly (OECD 274).

This has been experienced in the two countries after the economic turmoil.In UK, impacts of unemployment is hypothesized to be negative because of the following reasons; lack of money to pay government taxes leading to rise in much borrowing by the goverment, older employees disguising unemplyoyment by opting for other benefits e.g sickness, less consumer consumption leading to lower economic growth, decline in house price and losses in banks making lending hard.

Conclusion

The amount of money available to the consumers to buy goods and services at a given time should be enough to avoid strain by either the government or an individual. For one reason or the other, it is usually unavailable or sometimes not enough due to various factors such as unemployment, CPI, money in supply and interest rates.

Works Cited

Dijkman, Jeannette. Germany real estate yearbook. London: Real Estate Publishers, 2009.

Free, Rhona. 21^st century economics: a reference handbook. Thousand Oaks, California: Sage, 2010. Print.

Frumkin, Norman. Recession prevention handbook: eleven case studies. New York: ME Sharpe, 2010. Print.

Gottfried, Byron. Schaum’s outline of theory and problems of programming with Pascal. New York: McGraw-Hill. Print.

Gwartney, James. Macroeconomics: private and public choice. Mason, OH: South- Western Cengage Learning, 2009. Print.

Kolb, Robert. Lessons from the financial crisis: causes, consequences and our Economic future. Hoboken, N.J: John Wiley and Son, 2010. Print.

McEachern, William. Macroeconomics: a contemporary introduction. Mason, OH: South-Western Cengage Learning, 2009. Print.

Organization for Economic Cooperation and Development. OECD economic outlook July 2010. New York: Organization for Economic, 2010. Print.

Owen, John and Clark, Edward. Dictionary of international economics terms. London: Less50ns Professional Publishers, 2006. Print.

Turvey, Ralph. Consumer price index manual: theory and practice. Geneva: International Labor Office, 2004. Print.

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