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Tag: macroeconomics

  • Inflation and interest rates

    Inflation and interest rates are closely related. They are very common macroeconomic indicators that are tracked by economists. Interest rates are one of the measures that economies leverage to keep control of inflation.

    central banks keep a check on the interest rates to control inflation

    Higher interest rates

    When a nation’s central bank increases the interest rates, it becomes less motivating for businesses and consumers to borrow money by taking loans. This is because the returns that they would get on the savings interest would be much better than borrowing.

    With the rising interest rates, an economy becomes a less consumer-spending economy, as more and more money is put into saving rather than spending. This reduces the demand for products and services in the market. With the reduced demand, the prices of products and services are reduced. This results in a lowered inflation.

    Lower interest rates

    Exact opposite to the higher interest rates, when central banks reduce the interest rates businesses and consumers prefer to borrow money. As this borrowed money is cheaper it is easy to take the loans. The interest on both savings and loans is low. The returns on the money borrowed and spent are more than saving it.

    With the lowering of interest rates, consumers in an economy spend more money on goods and services. Due to the increase in spending, the demand for products increases hence the pricing. This results in a higher inflation.

    Is inflation good?

    Inflation is different across different industries. For certain industries, the prices of products are so volatile that they often change and increase every time. For some, where there are fixed prices, inflation may happen slowly. Typically pricing changes annually irrespective of the industry. The purchasing power of consumers decreases when the absolute amount of income remains the same over time. The cost of living gets higher but families during this time are earning the same amount of money.

    But when there is no inflation in an economy, it is not a good sign either. It means that the economy is not growing. There is no scope for more and more growth. Inflation happens when there is demand for products in the market. This happens when there is money in the hands of consumers and they are willing to pay. And there would be money with consumers when they are earning well, which happens when there is positive economy growth.

    So, high inflation is bad. However low and stable inflation is always good for an economy. Inflations, as seen, are the results of the demand and supply cycle. And a good demand from the consumers is always a positive thing.

  • How are currency rates decided?

    Ever wondered how the rate of the rupee against the dollar is decided? Why do all the currency rates fluctuate all the time? Why are the rates of different currencies different from other currencies?

    The currency exchange rates are determined by foreign exchange markets or Forex.

    currency rates are determined by foreign exchange market

    What is the foreign exchange market (Forex)?

    Forex is a global marketplace where currencies of different countries are bought and sold. The forex was set up with the increase in globalization. With the supply chain becoming truly global the need for forex was established.

    Consider an example of a mobile phone. The designing of its CPU is done in the USA, the manufacturing of its chip is done in China, its screen is sourced from South Korea, and its assembly is done in Vietnam. Every country will do their business in their local currencies. They would accept the payments in their currencies. However, since there are many currencies involved in this supply chain, there should be a way to standardize and decide the rates at which the currencies have to be accepted. This is where Forex comes into the picture.

    The stakeholders in a Forex market decide the value of currencies relative to other currencies. The major participants in a forex market are multinational companies, governments, and investors & traders. Each one has its own purposes to be in the Forex like hedging, speculating, or facilitating international trade.

    Factors affecting the value of currencies

    Current account deficit

    The current account deficit is when a country imports goods and services from a foreign country more than it exports. This means the country has to pay more amount of money in foreign currency than it receives in its own currency. This has to be done by borrowing foreign currencies in a huge amount by selling its own currency in the forex market. Also, this can loosen the investor confidence to invest as less exporting can mean a less productive nation. One method to attract foreign currency can be raising the interest rates which can mean slow growth as well.

    Interest rates and inflation

    A country with lower inflation means consumers have large purchasing power. This is a positive sentiment among the investors as their investments have a greater chances of succeeding because of a strong cash-flowing market. On the contrary higher inflation leads to negative investor sentiments.

    Central banks adjust interest rates to manage inflation. When the inflation is higher, interest rates are lowered for an easy flow of money in the market. However, lower interest rates can mean less foreign currency inflow.

    Central banks

    Based upon the nation’s economic policies and strategies central banks can intervene in the Forex markets to achieve their objectives. This can involve buying or selling currencies to determine it’s value.

    Market sentiment

    Market sentiment is the attitude of investors and traders towards a currency and its market. It is a combination of multiple factors. Market sentiment reflects in the investor’s willingness to invest in a market. If the investors feel a market is not currently suitable to bet on, they would invest their capital in safer currencies. This leads to a depreciation in the currency value of the market.

    Macroeconomic factors like GDP growth and inflation affect market sentiment. If these factors are strong, investments are favored by the investors.

    Central bank decisions play an important role in determining the market sentiment. If a country is increasing its interest rates to combat inflation, foreign currency is attracted with a positive sentiment.

    Geopolitical events like political instability, wars, or trade tensions lead to a negative sentiment and it can lead to lesser investments in the market.

  • Recession indicators

    Layoffs have become a frequently heard word in recent times. The venture capital flow has been reduced in companies. Macroeconomic conditions have forced the corporate world to let go of employees and freeze the new hires.

    recession has led to a global slow growth in 2022 and 2023

    What is a recession?

    A decline in the economy for consecutive quarters in a nation is when it’s called a recession. It means negative GDP growth for continuous quarters. There can be a number of factors causing recessions. It can be wars, pandemics, political instability, etc.

    The economy is a cyclical thing. There are continuous expansions and contractions in an economic cycle. When the economy reaches its peak, it gradually starts declining with time.

    Recession is a tough period for the economy. There are layoffs, hiring freeze, and dissolution of companies. During this period, it is difficult to enter the job market. For people in the job market, it is difficult to get raises and promotions.

    Recession indicators

    Gross Domestic Product

    The very first and direct sign of recession is negative GDPs for two consecutive quarters. The GDP of a nation is dependent on consumer spending, private investments, state investments, and net exports. When there is a reduction in GDP growth, there is a decrease in one or more factors that contribute to it. It can eventually lead to the decrement of other factors.

    Essentially, a negative GDP means lesser productivity of the nation and lesser amount of capital flowing into the economy.

    Manufacturing growth

    The net export is often heavily dependent upon manufacturing sectors. It naturally works on the principle of demand and supply. When there is a lesser demand the manufacturing sector, which gives employment to a huge number of people of all types – blue-collar and white-collar, contracts. This can lead to the lesser income or even loss of jobs.

    Unlike services, manufacturing is a more important indicator because of the large number of blue-collar employees working in it. Especially for developing economies, blue-collar workers are significant in number. And a dip in the income of this mass leads to a weakening economic activity.

    Retail and wholesale

    With the slashing of incomes, the retail and wholesale markets declined in the recession. This dip again leads to a low demand from the market for manufacturers to produce their products.

    Unemployment

    Unemployment during a recession rises with all the above factors contributing. With less income at hand, people try to save more money. Hence, there is less demand from the market leading to a gloomy environment. This makes the manufacturers slow down the businesses which can lead to layoffs and hiring freezes.

  • Capitalism vs Socialism

    Economic systems are the ways in which governments distribute all the resources among the public. Socialism and capitalism are the two most common systems of economies. What is the difference between them?

    capitalism and socialism are the two most common types of economical systems

    Capitalism

    Capitalism is an economic system that promotes private ownership in the society. It is a free economy where anyone has the liberty to start their own businesses. Leaving some exceptions, a capitalist economy is not regulated by governments or has a very minimum amount of regulations.

    Control over the production is in the hands of the owners. Since there are no regulations, the decision-making is solely focused on the interest of the company. Decisions about what to produce and how much to produce are made based on the supply and demand. The pricing of products is totally controlled by private members, and it may be raised depending on higher demands, and vice-versa.

    The goal is to maximize the profits.

    Socialism

    The exact opposite of capitalism, socialism promotes the idea of collective ownership rather than a private one. The idea behind this is to create a classless society where no one is above others. Since there is a collective ownership of things, a socialist economy is heavily regulated by the government.

    Control over the resources in socialism is in the hands of the central planner, normally the government. Hence the decision-making of a socialist economy is based upon the well-being of a larger society. Though the production is based upon supply and demand, the pricing is heavily controlled by the governments and is not drastically changed frequently.

    What is better?

    Well, there is no straightforward answer to this.

    A capitalist economy motivates individuals to work hard to earn more profits and control. A socialist economy doesn’t.

    A capitalist economy leads to innovations to win the market, a socialist doesn’t.

    In a capitalist economy, a huge portion of the wealth is controlled by a handful of individuals, but in a socialist economy, it’s ideally fairly distributed.

    A capitalist economy can be a winner-take-all situation, but a socialist is good enough for everybody.

    A capitalist economy leads to better products and services eventually, but this might not be the case in a socialist economy.

    There is no perfect answer to what is better. According to me, it is a mix of both with a significant majority being capitalism and a minority as socialism. I think so because a nation needs innovation, a better life for individuals, and motivation to work hard leading to a growing economy as well as a minimum financial status for individuals. Rather, this is the most practical approach as well for any nation to progress. We have seen countries progressing well with this approach to economic distribution.

  • What are economic indicators?

    Macroeconomics deals with the study of high-level impacts of a given economic, social, and political environment of a nation. Economic indicators, for a given time, help in determining the health of an economy. It helps in getting the answers to questions like – Where is a nation heading? What is the further growth looking like? As the demand and supply change, so is the production, and so do the economic indicators. These indicators are used by investors to make the investment decisions.

    economic indicators measures the macroeconomic performance of an economy

    Types of Economic Indicators

    Leading indicators

    Lagging indicators happen or are measured when events are already occurred. These trailing indicators are used to measure the final result of the economic event.

    Eg; unemployment rate. After the implementation of all the policies in a country by a government, the unemployment rate is calculated. This is the final quantified result of the policy implementation.

    Lagging indicators

    Lagging indicators happen or are measured when events are already occurred. These trailing indicators are used to measure the final result of the economic event.

    Eg; unemployment rate. After the implementation of all the policies in a country by a government, the unemployment rate is calculated. This is the final quantified result of the policy implementation.

    Coincident indicators

    Coincident indicators are in sync with the current event occurrence. They are real-time indicators that denote the present state of an economic event.

    Eg; producer price index (PPI). Tracking the price changes in all the sectors indicates the current condition and is the first accurate signal of future changes in inflation.

  • Microeconomics vs macroeconomics

    What is the difference between microeconomics and macroeconomics? How are they related?

    Microeconomics

    When will my car be delivered? When would the new model of my phone be available? What price should I keep for my product? What is my profit margin? How much is the demand for this TV model? 

    These are some normal questions asked by us as individuals or in our profession on a day-to-day basis. These are the questions that directly affect us as individual customers, producers, or suppliers.

    Microeconomics deals with how the supply and demand for goods and services affect the stakeholders of an individual market. It studies how individuals and businesses respond to the economic environment under specific constraints.

    Macroeconomics

    How much is the inflation of a nation? What would be the GDP for next year? How much would a nation grow for the next 10 years? What are the current interest rates?

    Now these are a set of some very trendy and newsworthy questions that we normally hear on channels or newspapers. These questions might not directly affect us as individual customers, producers, or suppliers.

    Macroeconomics deals with a broader and high-level impact on an economy, typically a nation, of policies, and politics. It is concerned with how a nation would respond to a given economic environment.

    The relation of microeconomics and macroeconomics

    Both fields complement each other as they study different parts of a larger picture. Microeconomics focuses on the verticals of an economy – individuals and businesses. Macroeconomics focuses on a larger horizontal – a nation.

    Macroeconomy is the net result of individual microeconomies. Individual microeconomics contribute to a greater effect on the national or international level. The same macroeconomic conditions affect different microeconomies in different ways. For eg; the net export of a nation depends on the demand and supply of the products delivered by individual companies. Here the net export is a macroeconomic factor of study, whereas the demand for a particular product and the supplying company is a microeconomic factor of study.

    To summarize, macroeconomy defines where a nation is heading which is dependent on the net effect of all the microeconomies.