Macroeconomics is a branch of economics that deals with the performance, structure, behaviour, and decision-making of an economy as a whole. Through Macroeconomics analysis, you will learn about interest rates, inflation, growth, employment, politics, and sentiment.
- Macroeconomic analysis is used in the evaluation of currencies, bonds, commodities, and stock indices.
- At the macro level analysis examines factors. that affect the economy in its entirety
- examples include interest rates, inflation, rate of growth employment, politics, and national sentiment.
- This analysis will tell us if the economy is expanding or contracting or if it’s booming or in a slump.
Macroeconomic Analysis – Interest Rates
- The interest rate represents the cost of borrowing money – either by individuals companies or even governments
- If people in companies borrow less, they have less money to invest and spend, and vice versa
- If interest rates go up this will result in more savings and less spending and eventually lead to a decrease in growth
- If interest rates go down this will result in higher borrowing and higher spending and in turn lead to an increase in growth
- Central banks meet monthly to set interest rate levels and these meetings are closely followed by market traders
Interest Rates – Effects on Markets
- An increase in interest rates will result in more savings and less investments and spending which will then cause a slowdown in the economy
- Higher interest rates mean demand for the currency increases as people sell currencies with lower interest rates, to buy the ones with higher interest rates.
- This will cause the value of the currency to increase stocks and interest rates are negatively correlated higher rates, implying higher costs of borrowing for both consumers and firms and this will hurt stock prices
- If interest rates increase, it means the cost of storing commodities will increase and this can hurt commodity prices
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Macroeconomic Analysis – Inflation
- Inflation is the increase in the price of goods and services in the economy
- When inflation increases, more money is needed to purchase the same quantity of goods and services and this will eventually result in a decrease in growth
- A typical measure of inflation is the Consumer Price Index or CPI which measures the changes in the price of a market basket of goods
- Another measure of inflation is the producer price index (PPI)which measures the change in the production prices of goods and services
- Inflation has a direct effect on the economy and this is because high inflation rates will prompt central banks to increase interest rates
Inflation Effect on Markets
- Central banks use interest rates to control inflation. An increase in inflation will have the same effect as interest rates on the markets except for commodities.
- When inflation increases central banks tend to increase interest rates. And this causes an increase in the value of the currency, inflation affects the competitiveness of an economy.
- An economy’s inflation increases exports due to higher costs of goods and services. and this will have a negative effect on the profitability of firms and their stock prices accordingly.
- Commodities are Goods and therefore their prices usually rise when inflation is accelerating.
Macroeconomic Analysis – Growth
- The health of an economy through the increase in goods and services produced can be monitored through the following indicators
- The most important way to measure growth is by the gross domestic product GDP which measures the value of all goods and services produced within a country
- Another indicator of growth is the international trade balance which measures the difference between imports and exports
- Retail sales also measure growth through consumer expenditure and it is used to assess the direction of an economy
Growth Effect on Markets
- Economic growth is the most-watched economic indicator because it enables increased living standards, improved tax, and revenues and helps create new jobs, having other things equal higher output and higher income will increase the revenue of the government and thus the value of its currency.
- When it comes to stocks an increase in growth reflects the increasing demand by consumers, which in turn results in higher profits for businesses.
- High stock prices now. because businesses are producing more, their demand for commodities like raw materials and energy will increase, resulting in higher commodity prices.
Macroeconomics Unemployment
- Another important macroeconomic factor, that should be examined is the job market. one of the most important ingredients of a healthy economy is the availability of well-paid jobs.
- When a person is actively searching for employment but is unable to find work, unemployment occurs.
- The unemployment is measured by the unemployment rate, which is basically the percentage of the people in the workforce without jobs but are able and willing to work.
- Non-farm payroll also measures employment through the number of additional non-farming jobs that are added each month
- An increase in unemployment (a decrease in non-farm payrolls) signals a slowdown in the economy.
Conclusion
Macroeconomic analysis provides us with a view of the current and future prospects of the economy changes. This will directly affect the valuation of currencies, bonds, commodities, and stocks.
Digi Assignment equips you with information useful for your Macroeconomics analysis and for your thesis.
