Economic Events: Macroeconomics and Microeconomics - Term Paper Example

Recent Report of Economic Events Economic Reports Introduction As Marthinsen says, macroeconomics and microeconomics together form the two major branches of economics as a discipline. Macroeconomics is a term that refers to the larger aspects of the economy. The term comes from an amalgamation of the two words; macro and economics. Macro drives from the Greek world makro and refers to something that is large or big. In the study of macroeconomics, the factors that are considered are those that affect the economy at the very highest level. Macroeconomists therefore look at the economy-wide trends instead of those trends that are at an individual consumer level. As such, this part of economics deals with issues like; Inflation Inflation is the rate at which the currency of an economy is losing its value. There are many factors that cause inflation. However, the rate of inflation is determined by various factors, most of which when well understood can be controlled in order to help in curbing inflation. Inflation is dangerous to an economy and when not contained properly, it can lead to the economy coming to a halt. Inflation leads to the cost of living to shoot up within an economy because as money loses value through inflation, the cost of commodities and services go up. As a result, when the rate of inflation is not matched by the rate at which common wages are increasing, it leads to a situation where a major of population can’t afford basic commodities with their income. This is definitely dangerous to a country’s economy and can lead to economic disaster such as the economic depression of 1930s in the United States of America. Inflation of a country’s currency also means that the currency will lose value against the currency of other countries. This can lead to trade issues where the trade between the two countries can be affected. If the country is an importer and its currency loses value, it would mean that they would are expected to part with much more for the same volume of goods that they were paying before. This can lead to an economic disaster that is hard to solve. Inflation thus offers a huge challenge to the economy because it is not possible to curb inflation completely but can only be maintained at the most basic level through economic policies of a nation. However, even in the presence of economic policies, the economic factors that can lead to inflation are also still too many and in some cases may still end up leading to inflation. Inflation rates rise and fall depending on a number of factors in the economy. In the UK, economic recession such as one that the economy is recovering from plays a major role in determining the inflation rates. However, with the UK economy recovering again, the rate of inflation has steadily improved and can be seen as going down every month, for instance, the rate of inflation went down from 1.9% to 1.6% percent between the month of June and July 2014. This is a very important drop and although it may look like a small number, in the context of the large macroeconomic factors and numbers, it is a big change. Additionally, the more serious issue is that there has been a steady drop of inflation in the last few years since 2010. This is indicated in the graph below that shows a steady drop in inflation rates in UK. From http://www.tradingeconomics.com/united-kingdom/inflation-cpi Unemployment rates The rate of unemployment is a very important economic indicator and is also a part of macroeconomics. Higher unemployment rates are indicative of poor economic performance while lower unemployment rates are indicative of good economic performance in an economy. Various nations have their own ways of identifying unemployment rates. Unemployment is not something that is direct and straightforward because not all people who are not employed can be considered to be unemployed. In this regard, although different countries use slightly different methods to measure unemployment in their economies, the basic idea is to measure the statistics regarding people in unemployment and who are active in seeking for employment. In this regard, some countries define an unemployed person as a person without work, and who has at any time in the recent years (the time frame is different in countries) sought for employment. What this means is that even if the person has no job but has not bothered to seek for employment in the last say three years, they will not be defined as unemployed. This then brings some challenges in determining the real unemployment rates in an economy in terms of real and exact numbers. The other challenge is that the statistics that define unemployment are only represented by just a small index rather than actually asking everyone about their employment status. Most nations only interview a very small cross section of the population and then use this as an index to identify the unemployment rates. In between, there is a high chance that the numbers may not be exact. However, the main idea is to determine the general rates of unemployment. Unemployment is a problem that most affects the youth because of a number of issues. First, these people are still young with no much to cater for their basic needs living. Secondly, according the very definition of unemployment which in most cases is defined as an unemployed person who is active in looking for employment in the last three years, it then excludes older citizens because they stop looking for jobs even if they don’t have one. Regardless, higher unemployment rates are risky for an economy because they lead to higher ratios of mature adults who are dependent on other adults who are economically productive. This reduces the average household income because in a family, only a few (sometimes just the father) will be earning while the other adults in the family are economically dependent on him. This does not work well with the economy. According to tradingeconomics.com, the unemployment rates in UK have improved by an appreciable margin in the last few years. It went down to 6.4% from 6.7 % and this is a five year low and also lower than the forty-year average of 7.6%. The unemployment rates have also been seen to decrease both in the last few months as well as the last few years. These are signs of a recovering UK economy after the bad times in 2012 from the recession of 2010 to 2012 and that the economy is doing well. The unemployment rates for the UK economy are very important and can be seen as related to inflation rates. As the unemployment rates go down, the inflation rates go down also and at the same time this affects the consumer price indices which have also been seen to improve in the last few years. From http://www.tradingeconomics.com/united-kingdom/unemployment-rate Gross Domestic Product (GDP) Gross Domestic Product refers to the productivity of an economy. In most cases economic units are equivalent to one country and therefore the GDP measures the production level of a country. There are a number of factors and formulae that are used to determine the GDP of an economy or a nation. The intention of measuring GDP is to identify the productivity of an economy and then determine how this relates with the other macroeconomic factors such as inflation, consumption rates etc. If the GDP is much lower than the consumption rates, it would mean that the country has a deficiency and this is also a negative macroeconomic indicator. As a result economy managers such as policy makers try their best to boost their GDP so that to make sure that the level of production in an economy is high enough to support the consumption in the economy. International finance /exchange rates Exchange rates form a very important part of the macroeconomic issues (Engel, 2010). With the world becoming ever more global every year, it means that trade relations between nations are increasing. This means that exchange rates of currencies have gone up and may continue to shoot up. That more countries still use their independent currency and that there is no unifying currency in the world means that the exchange rates have to be a problem that the global economy will have to deal with. These rates between two national money systems keep changing depending on a number of factors (Tucker, 2010). To begin with, it depends on the individual inflation rates within a certain country. As one economy goes through inflation, its currency loses value and this also means that the exchange rates between its currency and that of other nations will change. Secondly, it also depends on the standards of living within certain economies. For instance, the standard of living in developed nations such as UK or USA is much higher than the standard of living in a developing African nation such as Kenya. As a result, the value of one US dollar in Kenya is much higher than it is in US or UK. This them means that the exchange rates have to consider this and is why economists use the purchasing parity to compare the value of two currencies in two different countries. Purchasing parity compares for instance what one dollar can buy in USA and what the some US dollar can buy in the UK. The British Pound has gained power against other currencies such as the USD. This has also been caused by positive economic indicators in the last few years. Although the British economy was going through a rough patch in the past few years, its stable macroeconomic policies helped it to be able to overcome the burden and now it is doing well with all macroeconomic indicators such as inflation, employment rates etc improving. Exchange rates have no definitive advantage or disadvantage. As a result, how a nation will suffer or benefit from a low or high exchange rate is determined by its international trade deficit of surplus (Snowdon, 2007). A nation with a trade surplus (exporting more than it is importing) would benefit more when its currency is stronger than those ones of its trade partners. However, if the nation is importing more than it is exporting, having a weaker currency can be very advantageous. This kind of scenario was seen between the US and China where a currency war was seen to be happening in a cold way. The Chinese were making their currency weaker so that they could benefit more from the trade surplus between the two nations. In the case of Britain, it is not easy to tell when a weaker currency will be helpful or unhelpful, especially in the long run because its trade balance is changing with time. References: Engel, C. (2010). Exchange Rate Policies: A Federal Reserve Bank of Dallas Staff Paper. New York, NY: DIANE Publishing. Marthinsen, J. (2014). Managing in a Global Economy: Demystifying International Macroeconomics. Londn, UK: Cengage Learning. Snowdon, B. (2007). Reflections on the Development of Modern Macroeconomics. New York, NY: Edward Elgar Publishing. Tucker, I. (2010). Macroeconomics for Today. London, UK: Cengage Learning. Read More