Economics · May 3, 2022

What Are The 5 Important Macro Economic Variables

Introduction

Macro economic variables are factors that affect the economy of a country to a large scale. In fact, the citizens needs to be aware of these economic variables as they can predict the future potential of a country. Thus, these factors help in shaping the financial stability of a country.

The 5 Important Macro Economic Variables

  1. National income
  2. Saving and investment
  3. Inflation and interest rate
  4. Unemployment rate
  5. Flow from foreign direct investment

Lets us understand these macro economic variables in detail

5 important macro economic variables

National Income

National income is defined as the total income generated by all the citizen of a country. It can also be regarded as the value of products and services generated by a country throughout a fiscal year.

As a consequence, it is the sum of all a country’s economic operations over the course of a year, and it is measured in terms of currency.

National income figures show the income generating potential by the citizens of the country. Thus, a high national income will result in high tax collection. Hence, this can result in better infrastructure development, provide facilities to citizens and control inflation.

National income does not tell us the exact income earned by each citizen of a country. For example, 90% of the national income may come from only 1% of the population.

Impact of national income on economy:

  • Increases the purchasing power of consumers
  • Creating better cash flow in the economy
  • Beat the rising inflation problems

Savings and investment

Savings and investments will be defined as the amount of money saved or invested by citizens of the country after all of their expenses have been met.

Thus, this is an indirect reserve for the country. When the people of the country invest in companies, they provide an additional support for increasing the national income of the country.

When people save their money, banks and other financial institutions give it out to them as loans. Individuals utilize these loan amounts to either establish a business or buy goods for a better living. This can further enhance to increase the employment rate of the country.

Also Read: Why Are Mid Cap Mutual Funds Better For Long Term Investment

Impact of saving and investing on economy:

  • Using the surplus cash for business
  • Proving better loans and low interest rate
  • Generating employment
  • Improve national income

Inflation and interest rate

Inflation is defined as the increase in value of commodity due to the decrease in purchasing power of people.

One of the reasons for the rise in inflation is the difference in the demand and supply. When the demand for the product is not met by the available supply in the economy, there is an increase in prices of commodities.

A rapid inflation can result in reducing the purchasing ability of the consumers and thereby slowing down the economy.

A lower interest rate will be much favorable for the consumers to borrow more money for their personal / business needs. Thus, as the interest rates tend to rise, consumers avoid taking loans, thereby decelerating the growth.

Impact of inflation and interest rate on economy

  • Influences the spending habit of people.
  • Tendency to create unemployment.
  • Lesser amount of money given as loans.
  • Impacts the national income.

Also Read: How Does Inflation Affect The Mind Set Of Long-Term Investor

Unemployment rate

Unemployment rate of a country can impact the economy of the country to a great extent. This not only reduces the purchasing ability of the people but also impacts the tax collection severely.

It is a lagging indicator, which means it increases or falls in response to changes in the economy rather than forecasting them. The unemployment rate is likely to grow when the economy is in poor health and jobs are scarce.

Impact of unemployment rate on economy

  • Impacts the national income of a country.
  • Citizens cannot beat the rising inflation.
  • Impacts the stock market of the country.
  • Under utilization human resources.

Flow from foreign direct investment

Foreign investment is regarded as the money that inflows from a foreign country for economic or business development. Indeed, this flow from foreign land majorly impacts the economy of a country.

It is an invitation for the foreign companies to do business in a articular country. It also creates a healthy competition among the existing local brands, thereby not allowing any monopoly in the market.

Impact of foreign direct investment on economy

  • Generates employment.
  • Increases the national income.
  • Creates a better cash flow in the country.
  • Enhances a better standard of living.

Conclusion

These are the 5 important macro economic variables that can impact the economy of a country on a larger scale. Thus, one needs to thoroughly study these variables to judge the economic well being of a country.