According to Dwivedi (2012), macroeconomics is the study of the behavior and performance of the economy as a whole. It studies the relationship and interactivity between the ‘factors or forces’ that influence the level and growth of national output and employment, general price level, and the balance of payments positions of an economy. The study will examine the business cycle, Real Gross Domestic Product, inflation and unemployment inclusive of how the economic variables behave over the business cycle and a final look at the Australian economic statistics.
Business cycle is the alternating periods of economic growth and contraction, which can be measured by changes in real GDP. Business cycles are inherent in market economies. Alternatively, Peak, recession, trough and recovery mark the four phases of the business cycle. Peak is the business cycle phase in which real GDP attains its maximum after rising during a recovery while recession is a downturn in the business cycle during which real GDP declines, and the unemployment rate rises (Tucker 2010). It is also referred to as contraction. On the other hand, trough is the business cycle phase in which real GDP reaches its minimum after falling during a recession while recovery is an upturn in the business cycle during which real GDP rises and is also referred to as an expansion.
Real Gross Domestic Product, inflation and unemployment
The GDP is a specific metric. It only includes the total market value of all final goods and servicers produced within a country’s domestic boundaries during a designated time period. It does not include the value of non market activities such as unpaid house work nor does it include 3
illegal activities (Tucker 2010). It only encompasses the final goods and services, those that are sold to the consumers. It does not include intermediate goods and services that is, those that are utilized in the production process or are purchased for resale. A woolen jacket is a final good, but the woolen thread, zip, dye and the cloth that used in making it are all referred to as intermediate goods. The GDP excludes intermediate goods because to do so would equate to double counting (Tucker 2010). If a retailer pays five dollars for a car model and resells it for twenty dollars, it implies that there is an intermediate transaction (in which the retailer pays five dollars) and a final transaction (in which the consumer pays twenty dollars). When summed up, it adds to twenty five dollars, which is more than the product’s final value.
Inflation is a sustained increase in an economy’s average price level. The consumer Price Index and the Producer Price Index are the types of indices used to detect an increase in the price level. The GDP deflator can also be used to measure the ratio of nominal GDP to the real GDP measure (Tucker 2010). Notably, a higher-than-anticipated inflation benefits the employers while the lower-than-expected inflation benefit the workers.
Similarly, hyperinflation is a very high inflation rate. In this scenario, prices rise very quickly normally more than a thousand percent in a single year and the money becomes a poor store of value (Tucker 2010). On the other hand, stagflation occurs when an economy’s output decreases and its price level increase; production stagnates (recession) while prices and unemployment rise.
Under the United States employment statistics, the adults, civilians and the non institutionalized population fall under the employment category. This is an indication that the 4
statistics address those who are over sixteen years and are not in the military, prison, or a mental hospital. These are the people who form the labor force and can be counted as either employed or unemployed (Tucker 2010). A civilian, non institutionalized adult is deemed to be unemployed when the person does not have a job but is actively looking for one. Unemployment can be classified into three namely cyclical, frictional and structural and sums up total unemployment. The below diagram describes a hypothetical business cycle composed of four phases:
Peak, recession, trough and recovery. The straight line shows the growth trend line and measures the real GDP fluctuations and reveals that real GDP has trended upward over time.
Per year Real Peak GDP Peak Real GDP Trough Growth trend line Recession Recovery One business cycle (Tucker 2010) Time
In the ever-changing environment, the economic variables are also expected to change over the business cycle. For instance, industries expand in some years while the unemployment level