Macroeconomics Examples

Economic output

Economic output is one of the most important macroeconomic variables.

But how is economic output measured? Counting the total sales in an economy in itself doesn't actually give the figure of the value added to the economy. This is because intermediate sales are counted twice in economic output. Let's consider an example below.

As you can see, the price of the vegetables is counted twice. Once when the farmer sold them and then when a restaurant sold them. Hence, while calculating national economic output, intermediate sales are subtracted from the total output. Gross domestic product (GDP) is a widely accepted measure of national economic output.

GDP as a measure of economic output

Gross domestic product (GDP) is often used as a measure of economic output.

There are different methods to calculate GDP. The most common method is the expenditure method, which looks at the demand side. According to that method:

\(GDP = C + I + G + (X – M)\)

Where,

\(C\) = Final consumption expenditure on all goods and services

\(I\) = Final investment expenditure

\(G\) = Government expenditure

\((X-M)\) = Net exports

Unemployment rate

The unemployment rate is another example of a macroeconomic variable. For every economy, there is an acceptable rate of unemployment. The acceptable rate of unemployment is when the economy is producing goods and services at its full capacity. This is called the natural rate of unemployment.

But what is unemployment?

The unemployment rate, denoted by \(U\) is calculated as follows:

\(U=\frac{\hbox{Unemployed population}}{\hbox{Working population + Unemployed population}} \times 100\)

Inflation

Inflation is another example of an important macroeconomic variable.

Inflation indicates that the economy is growing, but high inflation is harmful. Inflation and unemployment rates are related to each other. If inflation increases, firms will produce more goods as their goods can be sold for more on the market. To do that, they will employ more people. Hence if inflation increases, unemployment decreases.

Examples of macroeconomic issues

Let's take a look at some examples of macroeconomic issues such as:

• recessions
• inflation and deflation

Examples of macroeconomic issues: Recessions

A recession is a significant decline in economic activity which lasts for months or years. In the UK, a recession is defined as negative economic growth for two consecutive quarters. Recession is a normal part of the economic cycle. Like night and day, a growth period comes after a decline.

A severe recession is called a depression. Recessions have an adverse impact on the economy. The most prominent example of a recession in history was the Great Depression.

The Great Depression

The Great Depression was the longest-ever economic downfall. It began in 1929 with a stock market crash and investor panic and lasted for 10 years. According to monetarist views, the US Federal Reserve's lack of monetary actions caused it, and according to Keynesian views, it happened due to a decrease in aggregate demand.

During the time of the Great Depression, unemployment increased significantly, world trade decreased, and many banks failed to survive.

Examples of macroeconomic issues: inflation and deflation

Inflation and deflation can become serious macroeconomic issues. If inflation is too high, it can lead to hyperinflation, where the rate of price increase becomes so high that everything goes out of control. There is little that can be done policy-wise, and people's savings become worthless. Deflation, on the other hand, is when the prices are falling. It is an indicator of insufficient money supply in the economy and is particularly dangerous due to the probability of deflationary spirals. These occur when deflation affects the circular flow of income in a way that deflation in itself becomes a self-reinforcing loop.

Let's take a closer look at two examples of macroeconomic issues: Yugoslavia and Japan.

Hyperinflation in Yugoslavia

An example of hyperinflation is the former Yugoslavia in the 1990s. On the brink of collapse, the country had already been suffering from high inflation rates of over 75% per year. The hyperinflation rate was doubling daily until it reached 313 million per cent in the month of January 1994. Lasting over 24 months, this was the second-longest hyperinflation ever recorded, with the number one spot belonging to Russia in the 1920s, which was over 26 months long.¹

Japan's Deflation

The prices of goods and services in Japan decreased from 1991 to 2001. This was the country's first lost decade. However, according to some economists, since then, Japan has been going through a deflationary spiral, and thus, the lost decades continue.

Japan was caught in a cash liquidity trap after the burst of the real-estate bubble. Citizens were saving money but were not spending it. The central bank in Japan failed to take corrective actions in time. To stop deflation, Japan introduced negative interest rates, but now they are unable to increase interest rates back to positive.

Macroeconomic shocks examples

Let's take a look at some examples of macroeconomic shocks such as:

• Oil Crisis (1973)
• Argentine Great Depression
• Crisis in Venezuela

Oil Crisis (1973)

In the 1970s, Arab nations of OPEC (Organization of the Petroleum Exporting Countries) put an embargo on exporting oil to the US and Europe due to a political situation between Egypt and Israel and the devaluation of the dollar. To cope with the lost export revenues, OPEC countries quadrupled the oil prices and reduced oil production. The hike in oil prices from $2 to $12 per barrel trickled to other sectors, quickly giving rise to high inflation.²

Argentine Great Depression

The Argentine Great Depression happened between 1998– 2002. External crisis and implementation of bad monetary and fiscal policies pushed the Argentinian economy into a depression. After 2003, Argentina started promoting exports and tourism. This contributed hugely to the recovery of the economy. Argentina entered the recovery phase in 2009 and continued steadily improving its economy.

Crisis in Venezuela

The Venezuelan economy was highly dependent on oil exports, and the government used all the oil export income for government spending. However, due to the high exchange rates for oil, the demand for Venezuelan oil drastically decreased.

In 2010, it was not sustainable for the government to keep funding social projects. In 2014, Venezuela entered into a recession, and by 2016 inflation reached its highest point in the history of the country: 800%.³

Macroeconomic stability examples

Although there are many examples of macroeconomic issues and shocks, there are also great examples of macroeconomic stability.

Some examples of macroeconomic stability are:

• Chinese economy
• Nordic model
• Singapore economy

Chinese economy

In China, pure capitalism operates with state-owned enterprises. Manufacturing, labour, and agriculture are major contributors to the Chinese economy. China's sustained economic growth was often referred to as an 'economic miracle.'

Although the economic growth rate of China is now moving at a slower pace due to economic imbalances, environmental issues, and social imbalances, their economy is still growing.

China can tackle this by concentrating on making the economy more reliant on the service sector, promoting the private sector, and some fiscal reforms. According to the World Bank, China should concentrate on moving towards a sustainable and more carbon-neutral economy.

Nordic model

Sweden, Norway, Denmark, Finland, and Iceland together follow the Nordic model, which is a combination of capitalism and socialism in social welfare and economic system. The key points of the Nordic model are no minimum wage, low corruption, strong property rights, a high tax burden, a public pension system, welfare, and a high level of equality.

Some criticise the model for being unsustainable because of the ageing population, immigration, high levels of taxation, and government intervention.

Singapore's economy

Singapore's economy has benefitted from globalisation. Since establishing a free market economy, it has developed trading agreements with countries like the US, China, Malaysia, Indonesia, and Japan. Singapore's economy now blooms in many sectors, such as port trading, tourism, and services, like banking, biotech, and oil.

Did you know that Singapore's economy is one of the four strong economies in Asia, which are called the 'Four Asian Tigers'?

Macroeconomic Trends Examples

Now that you've learned so many macroeconomic examples as well as the most important variables let's apply those and take a look at some macroeconomic trends examples!

We will take a closer look at the following:

• UK unemployment
• UK post-Brexit

Unemployment in UK

The unemployment rate in the UK in the fourth quarter of 2021 stood at 4.1%. This means that there were more than 1.3 million unemployed people in the UK at the time. The unemployment rate in the UK is gradually following a downward trend. It is currently falling, but it is still yet to reach the pre-pandemic rate of 4%.⁴

Fig. 1 - Unemployment rates in the UK, 2006-2021. Source: Office for National Statistics⁴

Figure 1 above shows how unemployment in the UK was high in the years 2006 to 2013. It was gradually decreasing until the pandemic hit in 2020.

UK post-Brexit

The United Kingdom's economy is a free market economy where buyers and sellers make decisions and are not controlled by government policies. The service sector contributes 72.79% to this fifth-largest economy.⁵

The economy also relies on imports. Imports are double the exports in monetary value. The main imports are machinery, transportation equipment, food, fuel, and chemicals. The exports are cars, crude oil, and pharmaceuticals. The US and Europe are the main trading partners of the UK.

In the last few years, the growth of the UK economy has slowed down, and inflation is rising as a combined effect of Brexit and the Covid-19 pandemic.