Macroeconomic Variables and Their Relation to Real GDP

MacroeconomicVariables and Their Relation to Real GDP


Macroeconomicvariables and their relation to real GDP

Macroeconomicsentails studying the entire economy by analyzing the variables thataffect it. Macroeconomic is all about government policies and marketforces that affect the entire economy rather than the choicesindividual persons make to meet their wants. It is worth noting thatmacroeconomic variables are identical for all countries. When onetalks about microeconomics, they refer to aspects such as monetarypolicy, supply-side economics, and fiscal policy. These are a fewexamples of the other variables that would form the discussion ofthis paper. Countries vary the way they react and implement policy toaddress macroeconomic variables due to the varying nature ofpolitical processes involved per country.

Ina macroeconomic model of any country, the variables are grouped intoendogenous and exogenous variables (Gjerde &amp Saettem, 2009).Endogenous variables are those that are inherent to the macroeconomy. Policy can manipulate them to favor the desirable directionthat the government desires the economy to go. Exogenous variablesare considered given and the government economy can only adjust tomitigate them in favor of what the government intends to achieve foreconomic growth and development. Endogenous variables include realgross domestic product, investment, employment, the general pricelevel, the wage rate, and the interest rate. In a single countrieseconomy, exogenous variables include world prices of commodities suchas oil and wheat, as well as the levels of income in the rest of theworld. In many cases, government policies are treated as exogenous.For example, choices about monetary policy and the government arespending and taxes. War and peace are also exogenous variablesbecause they have significant macroeconomic consequences.

GDPsize and growth rate

GDPgrowth rate is a vital indicator of the direction of the economy. Thesize indicates the size of the economy at a particular time (Bilson,Brailsford &amp Hooper, 2011). Normally, a country’s GDP iscompared with the previous period to ascertain growth or decline.There are three basic ways of measuring the GDP of a country: theincome approach, the expenditure approach and the output approach.


Thisis the total value of assets bought in the economy to contribute tothe production of goods and services (Obstfeld &amp Rogoff, 2011).Examples of assets are: machinery, buildings, property plant andequipment. Investment plays the following major macroeconomic roles:

  1. It increases the current domestic expenditure of a country by contributing the demand of capital good

  2. It increases the production capacity of a country

  3. Improves efficiency and cost effectiveness in production by introducing improved technologies

  4. It reduces the labor units per unit of production

  5. It adds value to the production process and

  6. It bridges the innovation gap with other countries.

Employmentand unemployment

Employmentcreates more income for individuals and the country. The labor force,which is actively involved in production processes earn income, whichis taxed as income tax. Others use the earning to invest inproduction (Obstfeld, Rogoff &amp Wren-lewis, 2006). When there isa labor force actively looking for employment yet not employed, therepercentage against those who are employed is the rate ofunemployment. An economy achieves full employment if all theavailable skilled and unskilled labor is underutilization in the mostefficient way. Employment has a close relationship with skills andknowledge. The economy could be growing to create more jobs, butstill has more people not employed. A situation of this kind iscalled structural unemployment, which occurs when the unemployed lackthe necessary qualifications for the available jobs.

Figure1: The graphtells theassociation between inflation and unemployment rate i.e. the Philipsrate


Inflationdenotesthedegree at which the general price of products rises, reducing thepurchasing power of consumers. Severe inflation or deflation isharmful to the economy. The theory of price determination theory isthe basis of explain inflation. According to the theory, price in acompetitive market the price of a commodity is determined by itsmarket demand for and market supply. The variations in the demand andsupply of a product are therefore, responsible for inflation.Inflation causes the redistribution of income within a society.Individuals whose incomes fail to increase with the rate of inflationwill find that the income will no longer maintain their standard ofliving.


Interestrate is a fundamental aspect of the macro economy because theydetermine the cost of capital for investment (Agénor, McDermott &ampPrasad, 2010). Interest rate determines how much borrowers can payover the principal for use of assets. The assets borrowed includeconsumer goods, cash, and other large assets such as premises andvehicles. When interest rate is high the cost of capital riseshence, attracting few borrowers. When interest rate decreases, moreborrowers will be attracted hence, increasing the level ofinvestment. More investment triggers consumption because it availsgoods and services through production.

Figure2: The above figure shows the relationship between interest rate andinflation


Therelationship between wage level and income level productivity isvital for the working of the economy. Wage determines the level atwhich labor is maintained determines the degree and mount of effortfrom the laborer, which in turn depends on the consumption level fromthe wage.

Figure3: productivity capacity of an economy

Indiagram, the equilibrium point of actual national income rises andthe mean price level remains comparatively persistent


Governmentregulation can be in form of taxes and punitive laws. They determinethe level of the income distribution and the rule of law as a way ofcreating an environment for all macroeconomic variables to interactharmoniously for the entire economy.


Agénor,P. R., McDermott, C. J., &amp Prasad, E. S. (2010). Macroeconomicfluctuations in developing countries: some stylized facts. TheWorld Bank Economic Review,14(2),251-285.

Bilson,C. M., Brailsford, T. J., &amp Hooper, V. J. (2011). Selectingmacroeconomic variables as explanatory factors of emerging stockmarket returns. Pacific-BasinFinance Journal,9(4),401-426.

Gjerde,Ø., &amp Saettem, F. (2009). Causal relations among stock returnsand macroeconomic variables in a small, open economy. Journalof International Financial Markets, Institutions and Money,9(1),61-74.

Obstfeld,M., &amp Rogoff, K. (2011). The six major puzzles in internationalmacroeconomics: is there a common cause?. In NBERMacroeconomics Annual 2000, Volume 15(pp. 339-412). MIT press.

Obstfeld,M., Rogoff, K. S., &amp Wren-lewis, S. (2006). Foundationsof international macroeconomics(Vol. 30). Cambridge, MA: MIT press.