Macroeconomics
With 3 % monthly inflation, in a year prices do not rise 36 % but 42.6 %. A fixed-term deposit at 40 % nominal annual interest earns barely 3.9 % in real terms, and one at 36 % earns nothing.
01Variables and indicators
Macroeconomics looks at the economy as a whole. Its main variables, and the indicators used to measure them, are:
| Variable | Indicator |
|---|---|
| Output | Gross domestic product (GDP), nominal and real; its growth rate |
| Prices | Consumer price index (CPI), GDP deflator, inflation rate |
| Employment | Labor force participation, employment and unemployment rates |
| External sector | Trade balance and balance of payments, exchange rate, reserves |
| Money and credit | Monetary base, monetary aggregates, interest rates |
| Public sector | Fiscal balance, public debt |
In Argentina, INDEC (the national statistics and census institute) publishes the national accounts, the CPI and the Permanent Household Survey, from which the employment rates are derived; the Central Bank (BCRA) publishes the monetary and exchange-rate variables.
02National accounts
GDP is the value of the final goods and services produced in the country in a period. It can be measured in three ways, which must coincide: by adding up the value added of each sector —sales minus inputs—, by adding up the income generated by production —wages, profits, rents, net taxes—, or by adding up the expenditure on final goods:
Nominal GDP is valued at the prices of each year; real GDP, at the prices of a base year, and its change measures how much output grew in quantities. The ratio between the two is the deflator. The CPI, on the other hand, measures the cost of a fixed basket of household consumption, and its change is the inflation rate used to adjust wages and contracts.
03Inflation and the real interest rate
Rates compound: a monthly inflation \( \pi \) sustained for \( n \) months gives a cumulative inflation greater than \( n\,\pi \). An investment yields in real terms the amount by which its nominal return exceeds inflation, according to the Fisher relation:
The price index (red) and the capital of a fixed-term deposit renewed every month at the chosen nominal rate (blue), both with base 100. The green line is the purchasing power of 100 pesos kept without investing.
04Interpreting economic reality
The economy does not grow evenly: it goes through cycles of expansion and recession. The government tries to smooth them with fiscal policy —public spending and taxes— and the central bank with monetary policy —interest rates and the quantity of money—. Inflation can originate in the issuance of money to finance a deficit, in rising costs such as the exchange rate or energy, or in the inertia of expectations and indexed contracts. Reading the indicators together, with their definitions and sources, and distinguishing data from opinions, is the basis for understanding economic news and for planning a project in a changing context.
05In the laboratory
Download from INDEC the series of GDP at constant prices for the last ten years and calculate its annual growth rate.
With the monthly CPI changes of the last year, calculate the cumulative inflation and compare it with the simple sum.
Estimate the local value added of an electronic unit assembled in the country with imported components.
06Common mistakes
- Adding up monthly inflation rates. They compound: twelve months at 3 % give 42.6 %, not 36 %.
- Comparing nominal GDPs of different years. Real GDP has to be used to measure growth.
- Counting intermediate goods twice. Only final goods or value added count.
- Judging an investment by its nominal rate. What matters is the real rate.
07Self-assessment
What annual inflation does 3 % monthly give?
\( 1.03^{12} - 1 \approx 42.6 \) %.
What real rate does a fixed-term deposit at 40 % nominal annual give in that context?
It yields 48.2 % nominal over the year; in real terms, \( 1.482/1.426 - 1 \approx 3.9 \) %.
What are the components of GDP by the expenditure approach?
Consumption, investment, government spending and exports net of imports.
What distinguishes real GDP from nominal GDP?
Real GDP values output at the prices of a base year; nominal GDP, at current prices.
08Further reading
- Olivier Blanchard. Macroeconomics. Pearson. (Spanish edition: “Macroeconomía”.) The reference textbook on output, money, inflation and economic policy.
- N. Gregory Mankiw. Macroeconomics. Worth Publishers. (Spanish edition: “Macroeconomía”, Antoni Bosch.) National accounts and the basic macroeconomic models.
- INDEC. Metodologías del sistema de cuentas nacionales y del índice de precios al consumidor. indec.gob.ar. (In Spanish.) How the variables on this page are measured in Argentina.