Macroeconomic Indicators are used by economists and analysts to understand the economy. There are many macroeconomic indicators but the following are some of the important and commonly used ones.
- Current Account Deficit
- Foreign Exchange Reserves
- Net External Assistance
- Fiscal Deficit
- Money Supply
- Industrial Growth
- Gross Domestic Investment
- Gross Domestic Savings
- Incremental capital-output ratio
Current Account Deficit
The current account deficit refers to the deficit balance in the current account of a country's balance of payment. The balance of payments of a country consists of two accounts - (1) Current account; and (2) Capital account. The current account includes Merchandise (exports and imports of goods), Non-monetary gold movements and Invisibles (Services). Exports of goods and services are recorded as "Credits" in the current account; Imports of goods and services are recorded as "Debits" in the current account. If the exports are more than the imports then we get a current account surplus; if imports are more than exports then we get a current account deficit. A large and consistent deficit is not good for an economy as it could mean that there are structural issues with the economy, which have to be addressed. This deficit is tracked as a percentage of GDP.
Foreign Exchange Reserves
Healthy foreign exchange reserves are important for any economy, as every economy depends on some form of imports, and these imports need to be met from the foreign exchange reserves. Developed countries, generally, have good foreign exchange reserves, while developing countries have less of these reserves. The more the foreign exchange reserves the better it is as it means the country would be able to absorb any external currency shocks. These reserves are, generally, tracked as a percentage of imports. We will discuss more on this in the article on Balance of Payments.
Net External Assitance
External Assistance is defined as "all official resources which the recipient can use or otherwise benefit from in pursuit of its objectives". It generally means all loans, grants, technical assistance, guarantees and other assistance provided or committed under a binding agreement by a multilateral external assistance agency such as the IMF, World Bank, Asian Development Bank (ADB), etc., or other countries. Countries both give and take external assitance and the net external assistance is what is generally tracked, as a percentage of current account deficit. These assistances are sought to partly fund the current account deficit.
Imports are inevitable for any country, it could be in the form of raw materials or capital goods. Imports could be for essential items or non-essential items. Too much dependence on imports of essential items can create Balance of Payment issues during external crisis. This is tracked as "Annual growth rate".
Exports bring foreign exchange reserves to the country. In general, more the exports, the better it is for the country. However, too much dependence on exports can also be an issue for the economy if there is a world wide economic slump. Countries tend to ecourage exports so as to earn foreign exchange reserves, which can then be used to pay for imports. This is tracked as "Annual growth rate".
Fiscal Deficit is the difference between the total income of the government and its total expenditure. It tells us how much the government need to borrow to meet this deficit. Most of the fiscal deficit is funded through borrowing, while some part of the deficit can be funded through other sources. The fiscal deficit can arise due to increase in revenue expenditure or capital expenditure or both. Developed countries may or may not have fiscal deficit, while developing countries will have some fiscal deficit due to both revenue and capital expenditure, particularly due to capital expenditure.
The money supply or money stock is the total value of money available in an economy at a given point of time. The quantity of money in an economy changes as per needs of the economy. In general, increase in money supply will lead to increase in prices in the long term Note that this relation is not that simple or direct.
The government can increase money supply to support growth or reduce it to contain inflation. It is tracked as a "annual percentage change".
The GDP and its growth rate are important and common indicators of the state of an economy. These two are probably the most commonly reported and used indicators globally. A healthy GDP growth rate continously on a long term basis can convert an developing country into a developed country. GDP growth rates means increase in economic activity, which, in general, means increase in overall employment, reduction in proverty, increase in domestic consumption, and a lot of other related good things. Therefore, every country tries to increases its GDP growth as much as possible. However, there is a limit as to how fast the GDP can grow on its own. A too fast GDP growth rate can cause inflation to increase and elevate income and wealth discrepancies between the rich and the poor. Similarly, too slow GDP growth rate in an economy where there are too many idle resources (capital, labour and resources) can mean missed opportunity and can create social unrest due to lack of employment. Therefore, it is important for countries to ensure that there is sufficient GDP growth rate as per the country's specific requirements. This is tracked in terms of "Annual growth rate".
Industry provides employment to labour and taxes to government. It is important for every country to ensure that there is sufficient growth in the industrial sector. A well developed industrial sector would provide self-sufficiency to the country and may also add to exports.
Inflation is both good and bad. High inflation is bad, very low inflation is equally bad. What is desirable is moderate levels of inflation. But controlling inflation is easier said than done. If a country wants growth, it might have to increase money supply and promote both domestic consumption and exports, but this will also increase inflation. So, growth comes with inflation. If there are unused resources (capital, labour and materials), high GDP growth can be achieved without significant increase in inflation. However, when the resources are near about or fully utilised, any further increase in GDP growth will necessary increase inflation. Inflation needs to be controlled because it affects the poor and the retired more than the rich. High inflation also has other adverse affects which are beyond the scope of this current article. The goal of the finance ministry and also the central banks is to manage inflation within acceptable ranges or bands. This is tracked as "annual percentage change".
Gross Domestic Investment
The relationship between savings, investment and economic growth has puzzled economists ever since economics became a scientific discipline. Generally, a portion of income is saved and put into investments. Investment is linked to economic growth (though this relationship may or may not be strong) but is a prime focus area for many governments. Growth is the result of increase in industrial production. Growth in industrial production depends on capital formation. Part of the capital formation can be achieved if there is a strong domestic investment backed by savings. There are critics to this argument but in general all governments track this indicator. This is tracked as "percentage of GDP".
Gross Domestic Savings
Domestic investment, in genral, results from domestic savings. A healthy savings rate is desirable but may sometimes also be a cause for concern. If there is a general tendency or habit to save a lot instead of spending, then domestic consumption will suffer. If domestic consumption is not good then industrial output may suffer, resulting in GDP slump. This has happened in Japan many a times.
Incremental Capital Output Ratio
It is the relationship between the level of investment made in an economy and the consequent increase in GDP. In other words, we can think of this as the amount of capital needed to produce one unit of output. For example, let's suppose that the capital investment in the economy is 20% of GDP and the GDP growth rate is 5% then the incremental capital output ratio is 20/5 = 4. This ratio can be very useful for the economic planners as it tells them how much capital is required to achieve a desired growth rate, and accordingly they can plan for capital expenditure. Low capital output ratio means that low level of investment is required to achieve the target growth rate. This rate changes over time with changes in technology and the composition of an economy. In general, low capital output ratio is desirable.
The following table shows these indicators for India over the last few years.
|Current account deficit
||% of GDP
END OF MY NOTES