Economic units include households (households may be one person or more than one person), firms, or an industry.
Now, some economic units generate more income than they spend and have funds left over. These are called surplus economic units. Deficit economic units are those which generate less income than they spend and need to acquire additional funds in order to sustain their operations. The purpose of a financial system is to bring the surplus economic units and deficit economic units together for their mutual benefit.
The art of macroeconomics is useful in a Wall Street financial career if you find work on a macro hedge fund. Now, the game of macroeconomics seeks to understand the economy as a whole; and not its elementary units. But macroeconomics is not just a sum of microeconomics — this is because it includes effects of interactions, which we sometimes need to simplify to form reduced-form models.
Principles of macroeconomics:
(i) Aggregate output: This economic output is the primary economic indicator considered in macroeconomics. It is measured by the Gross Domestic Product (GDP) of a country or region. But instead of intermediate goods, GDP deals with the final goods (and services) produced in the economy during a given period.
Now, aggregate demand relates to the total economic output and it incorporates the idea of how much people are willing to buy goods/services at different price points. The components of aggregate demand [like Consumption, Investment spending, Keynessian Government spending, and (spending on Exports minus spending on Imports)] are also macroeconomic.
Nominal GDP is the total dollar value of the goods (and services) produced in a time period using current market prices (i.e. without considering price changes due to inflation). It relates to the total economic output, and it depends on the volume of what was produced and the prices of what was produced. Since nominal GDP can grow due to both volume (perfect!) and prices (bad!), we remove the inflation-causing component using the most common kind of GDP known as real GDP. Real GDP is a realistic concept which captures only the quantity of what was produced, but it unfortunately doesn’t capture the quality — thus can misrepresent economies with huge production from the service industry.
Errors in GDP measurement (e.g. GDP initially shown to be higher than a previous quarter, while in fact being lower) can have policy, political (during elections), and business ramifications. It is suggested that signals from the equity and bond markets could then provide better clues on the direction of the economy. But note that imprecise GDP estimates undergo improvements as more information become available during revisions, since it takes a long time to receive complete data.
Now, from what was explained, the units of nominal GDP in the US is dollars, while the real GDP is unitless.
(ii) Economic growth: It’s the idea of the long-run increase in the GDP. Nominal GDP growth is [(Year 2 Nominal GDP — Year 1 Nominal GDP)/(Year 1 Nominal GDP)]*100%. Real GDP growth is [(Year 2 Volume — Year 1 Volume)/(Year 1 Volume)]*100%.
GDP is a single gross number that can rank countries according to their performance of what they produced (without distinction) over a period. Thus, it determines how a country can borrow and at what rate. But, firstly, the policy tool is just backward-looking and tells you nothing about whether you can produce the same next year. Secondly, GDP is not a measure of wealth but of income. It ignores value destruction by mismanaging human capital; or by withholding education from certain society groups or the depletion of natural resources for immediate economic gain. So, it ignores sustainable economic growth. Thirdly, both GDP and GDP per capita ignore unequal distributions in their formulas; so we note that fast growth as measured by GDP has been considered as success in itself (encouraging growth at any cost), rather than a means to an end; thus clean air, well-being, public services or equality have been readily sacrificed. Fourthly, GDP measures only cash transactions, which includes illegal transactions while excluding/giving less priority to the informal sector, as well as volunteering and social unpaid work. Thus, convenient Do-It-Yourself internet knowledge decreases GDP as compared to using a fully paid-up GDP-producing employee. Fifthly, while two consecutive quarters of a GDP’s decline usually define a recession (— which would challenge an existing government in a new election), unequal distribution of wealth is also harmful, as it’s what is believed to have caused a populist backlash that elected Trump’s first term in US, and what contributed to the Brexit decision by the British. Therefore, measures of wealth, equality, leisure, online wellbeing, and net domestic product; adjusted for negatives (like pollution) should be considered to get the whole picture.
Now, one of the topics in International Trade and Finance is globalisation — this describes the international outreach of countries for the purpose of social, cultural, political and economic liaisons (such as movement of labour). Because of globalisation, the Gross National Income (GNI) can be preferred because it adjusts for income generated by foreign-owned corporations and foreign residents to reflect on income actually retained by a country. This is useful since globalisation might make a GDP to be greater than GNI.
(iii) Labour markets considerations: There are three groups of people (a) The employed E are those in paid-employment or self-employment. (b) The Unemployed U include those above 15 and not employed, but have actively searched for work at some time during the last four weeks. Here, we see that a low-level of unemployment should be an important public policy priority. An economy operating with high U is like a company operating with a working but unused factory. (c) The Not-In-Labour-Force (NL) or the Out-of-Labour-Force include children or the retired or those rearing children or those who have quit looking for a job due to inability to find one.
The labour force L is the sum of U and E. Then, the unemployment rate u is (U/L)*100%. In the US, the US Current Population Survey is used in the computation of u.
The participation rate p is [L/((L+NL)who are not children)]*100%.
The employment-WorkingAge population ratio n is [L/((L+NL)who are between 15 and 64)]*100%.
Unemployment is measured by u and the employment rate is measured by n.
An economic migrant is a migrant worker; can be denoted particularly as ‘migrant U’.
A different take to the William Martin poem ‘Do not ask your children to strive.’
Ask your children not to strive, downrightly.
Not to strive for extraordinary lives outrightly.
Tell them, “It’s dark because you are trying too mightily.”
Such striving is foolishness — this was said so even by Huxley.
So, lightly child, lightly. Learn to do everything lightly.Show them the joy of testing slightly;
Posting on X, Using DeepSeek AI, and even Grammarly.
Then show them how to cry rightly,
When pets and ordinary people die knightly.
Now, tell them, “In the end, financial freedom will prevail gradually.”
Like how that YouTuber, Andy Thomas, always quips at the end of his videos brightly.So lightly, my darling, lightly.
And Oh…even when you travel, travel lightly!
(iv) The concept of Inflation (and deflation): Inflation is a sustained rise in the general level of prices; while inflation rate is the rate of that rise.
The GDP deflator is a broader measure of inflation, covering the price of all goods and services produced in an economy. The Consumer Price Index (CPI) is a narrower measure of inflation, covering only the price of goods and services bought by consumers. Now, while the GDP deflator’s basket can change from year to year, the CPI’s basket is fixed. But then, it’s also important to know that the CPI is not a neutral approximation of economic reality. It has always existed as a creature influenced by politics and power.
Deflation is the sustained decline in the general level of prices.
A connection with the microeconomics concept of supply and demand is formed when inflation intersects with demand. Demand-pull inflation occurs when the consumer-demand for goods and services is higher than the available supply, while cost-push inflation is triggered by an increased input business costs (like costs for raw materials or wages) even though there might be no increase in aggregate demand. So, in cost-push inflation, the rise of production costs results in a decrease of aggregate supply.
The inflation caused by cost-push inflation is somewhat the wrong kind of inflation as it’s characterized by rising prices and falling real GDP. A falling real GDP results in decreased demand for goods and services that then compels firms to lay off workers and decreasing the employment. As such, this type of inflation results in a fall in living standards.
- Economic growth is the gas, government stimulation is the transmission, and interest rates are the brakes. A simplistic approach would be to draw correlations among them. The truth is, in order for the ride to be smooth, all of them have to be managed together.
Economist Steve H. Hanke defined a hyperinflation as an inflation in which the inflation rate exceeds 50% per month for at least thirty consecutive days. Hyperinflation is a vicious circle because it is an uncontrollable situation (when there is no intervention) in the sense that it is a spiral inflation that causes higher inflation.
Purchasing Power Parity (PPP) is an economic theory that is the ‘gold standard’ for measuring inflation during episodes of hyperinflation. PPP GDP is a measure of a country’s GDP that’s adjusted for the cost of living; and PPP GDP per capita can be used to compare economic well-being across countries through a basket of goods approach. Here, we first calculate the GDP, then adjust for population to get GDP per capita, and then adjust for prices to get PPP GDP per capita. But since PPP GDP involves the GDP measurement, even when a comparison is correct, it can be exaggerated due to the problem of comparability (aka the Big Mac Problem). Why? A product (that a typical consumer buys) which exists in one country may not exist in the other; if it does, the quality might be different; if it’s not, its perception of fair price might be different.
(v) The Quantity Theory of Money, and Neutrality of Money: The Quantity Theory of Money is a monetary economics theory stating that the general price level of goods and services (which is a nominal economic variable) is directly proportional to the amount of money in circulation, meaning that a significant increase in the money supply will lead to a corresponding increase in prices, essentially explaining inflation (and wealth effect) through changes in the money supply.
The Quantity Theory of Money is the theoretical foundation of the concept of Money Neutrality — which states that changes in money supply (i.e. the stock of money) or monetary variables (like nominal interest rates) only impact nominal economic variables (like prices and nominal wages) and do not influence real (i.e. inflation-adjusted) economic variables (like real GDP or real consumption or employment).
(vi) The Circular Flow Model: lt’s a diagram that shows how money, goods, and services flow between households, businesses, and the government in a closed loop. It’s also used to explain how the economic actors (i.e. households, businesses, and the government) interact with each other.
(vii) The concept of the Phillips Curve: It’s an economic model which shows that, in the short run, there’s a negative relationship between inflation and unemployment. Note that inflation doesn’t affect the long-run Phillips Curve.
(viii) The concept of Crowding Out: It’s an economic feedback phenomenon that occurs when government spending increases (i.e. through doing a lot of borrowing which in turn increases interest rates), leading to a decrease in private sector spending.
Sources:
Reserve Bank of Australia (RBA).
Internet articles.
YouTube.