Treasury professionals are always influenced and guided by macroeconomic performance and movement of macroeconomic variables such as interest rate, exchange rate, national savings and investment etc. Therefore, a brief discussion on macroeconomic performance, operation of open economy macroeconomics, and macroeconomic accounts would not be out of place here for treasury professionals. Macroeconomic performance of a country can be judged by examining its macroeconomic accounts (national income account, fiscal account, monetary account and external sector account), which contain many macroeconomic variables like gross domestic products (GDP), the unemployment rate, inflation etc.
GDP is the most comprehensive measure of total output of an economy. It is the measure of the market
value of final goods and services produced in a country during a year. There are two ways to measure
GDP: one, nominal GDP which is measured in actual market prices and second, the real GDP which is
calculated in constant or invariant prices. Movement in real GDP is one of best measure of economic performance of a country.
Of all the macroeconomic indicators, unemployment is most directly felt by
the
individuals. The unemployment rate is the percentage of the labor force that is unemployed. The labor force includes all
employed persons and those unemployed individuals who are seeking jobs. It excludes those without work but not looking for jobs. The unemployment rate tends to reflect the state of the business cycle: when
output is falling (recession), the demand for labor falls, and the unemployment rate
rises.
Macroeconomic performance also hinges on price stability
or controlling inflation. The most common
measure of the overall price level is
the consumer price index, known as CPI. It measures the
cost
of a fixed basket of goods (including
items such as food, shelter, clothing, medical care etc.) bought by the
average urban/rural consumer. We consider changes in the overall price levels as the rate of inflation, which denotes
the
rate of growth of the price level from one year to the
next.
When prices decline,
we call it deflation.
The macroeconomic performance of
a country can
be influenced by the government through adopting two
major macroeconomic
policies tools: Fiscal policy and Monetary Policy.
The fiscal policy is concerned with government revenue and expenditures. Government expenditures come in
two distinct forms: one, government spending on goods and services, and two, government transfer payment. Govt. expenditures affect the overall level of spending in the economy
and thereby,
influence level of GDP.
The other part of fiscal policy, government revenues, is involved with government tax and non-tax sources of income. Taxation affects the overall economy in two ways: one, taxes affect people‘s income (disposable or spendable income) and second, taxes affect the prices of goods and factors of production.
The second major macroeconomic policy
is
monetary
policy, which central bank conducts
through the
management of money, credit, and banking system. By
changing the money
supply, the central bank can influence many financial and economic variables such as interest rates,
stock
prices, housing
prices, and foreign
exchange rates. Restricting
the money supply leads
to higher
interest
rates and
reduced investment, which,
in turn, causes a decline
in GDP and lower inflation. If the
central bank is
faced
with a business downturn, it can increase the money supply and lower interest rate to stimulate economic
activity.
Other than fiscal and monetary
policies,
countries often
seek income policy, concerned with direct control
over
prices and wages and external sector policy such as trade
policy, exchange rate
policy etc.