ECONOMIC VARIABLES: WHAT ARE THEY FOR, TYPES, EXAMPLES - ECONOMY - 2025

The economic variables are all data recorded in an economic model. They are any indicator that helps determine how an economy works. Some examples are: population, poverty rate, inflation, and available resources. The relationships between these various variables are widely studied in the field of macroeconomics.

While macroeconomics refers to the economy in general, microeconomics reduces its scope of study to individual agents, such as consumers and companies, and their respective economic behaviors and decision-making patterns.

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Influence

These variables can include anything that influences the direction of a particular market on a large scale. For example, fiscal policy and various regulations can affect state and national economies, while also triggering broader international implications.

Therefore, economic variables are the influential fiscal, natural or geopolitical events that broadly affect a regional or national economy. They tend to impact broad swaths of populations, rather than just a few selected individuals.

They can include costs such as wages, interest rates, government activities, laws, policies, tax rates, and unemployment. All of these variables occur outside of the business or the investment itself, but they greatly influence the value of the investment in the future.

These variables can also include any information that has an effect on the current or future value of what is being examined.

What are economic variables for?

Economic variables are the main signals or indicators that mark current trends in the economy.

They are fundamental data about the market and the economy, which are taken into consideration when calculating the value of an investment or business.

In other words, investors and entrepreneurs must pay attention to external economic forces when valuing an investment, in addition to the intrinsic value of the asset.

On the other hand, like all experts, the government to do a good job of macroeconomic management of the economy must study, analyze and understand the main variables that determine the current behavior of the macroeconomy.

Therefore, the government must understand the variables of economic growth, why and when recession or inflation occurs, and anticipate these trends, as well as what combination of policies will be the most appropriate to solve the ills of the economy.

Thus, these economic performance variables are closely monitored by governments, businesses and consumers alike.

Types of economic variables

-Predictor variables

These variables change before the big economic adjustments are made. As such, they can be used to predict future trends.

Stock Exchange

This variable is the one that most people look at first. Since stock prices are based in part on what companies are expected to earn, it can indicate the direction of the economy, if earnings estimates are accurate.

Manufacturing activity

It strongly influences the gross domestic product (GDP). An increase in this activity suggests a higher demand for consumer goods and, therefore, a healthy economy.

Inventory levels

High inventory levels can reflect two very different things: An increase in demand for inventory is expected, or there is a lack of demand.

In the first scenario, companies intentionally increase inventory to prepare for increased consumption in the coming months. Companies with high inventory can meet demand and therefore increase their profits.

However, in the second scenario, the high inventories reflect that the company's supplies exceed demand.

Not only does this cost businesses money, it also indicates that retail sales and consumer confidence are down.

Retail sales

High retail sales directly increase GDP, also strengthening the local currency.

When sales improve, companies can hire more employees to sell and make more products, which in turn puts more money in consumers' pockets.

Housing market

A decline in house prices indicates that supply exceeds demand, that existing prices are unaffordable, or that prices are inflated and need to be corrected as a result of a housing bubble.

Decreases in this market have a negative impact on the economy for several reasons:

- They decrease the wealth of the owners.

- They reduce the amount of construction work required to build new homes, which increases unemployment.

-Historical variables

They reflect the historical performance of the economy. Its changes are only identifiable once an economic trend has been established. They help identify long-term trends.

Gross Domestic Product (GDP)

Economists consider GDP to be the most important variable in the current health of the economy. When GDP increases, it is a sign that the economy is strong.

Unemployment rate

Measures the number of job seekers as a percentage of the total workforce. In a healthy economy, the unemployment rate will be 3% to 5%.

However, when the unemployment rate is high, consumers have less money to spend, negatively affecting retail stores, GDP, and housing markets, among others.

Consumer's price index

It reflects the increase in the cost of living. It is calculated by measuring the costs of essential goods and services, such as health care, housing, food, and transportation.

Inflation is determined by the increase in the average cost of the total basket of products over a period of time.

Interest rates

They represent the cost of borrowing money. They are based on the federal funds rate, which is the rate of lending money from one bank to another. These rates change as a result of economic and market events.

When the federal funds rate increases, banks have to pay higher interest rates to get money. In turn, they lend money at higher rates, making borrowers reluctant to borrow.

This discourages businesses from expanding, and consumers from borrowing. As a result, GDP growth stagnates.

On the other hand, rates that are too low lead to a higher demand for money and to increase the probability of inflation, which can distort the value of the currency.

Balance of trade

It is the net difference between the value of exports and imports, showing whether there is a trade surplus or a trade deficit.

Trade surpluses are generally desirable. However, trade deficits can lead to significant domestic debt.

In the long term, a trade deficit can lead to a devaluation of the local currency, as external debt increases.

Importance

Because expert predictions are often unreliable, it is important to develop your own understanding of the economy and the factors that shape it.

Paying attention to economic variables can give you an idea of ​​where the economy is going so that you can plan finances in general.

Expectations about economic variables play a considerable role in an economy. Economists and analysts often look to these economic factors when they are looking for ways to explain or meet economic policy objectives and create economic stability.

In doing so, they attempt to predict future levels of employment, inflation, and other key economic variables. These predictions affect the decisions made today by governments, individuals and companies.

Perception of the economy

When businesses and the general public perceive that the economy is strong, they are much more comfortable spending money. This spending in turn creates more demand for new and existing products and services.

Companies will adjust to this by increasing production to meet increased demand. This may include hiring more workers and / or manufacturing more inventory, which in turn can serve to prolong a growth cycle.

In general, it is much easier for a business to increase sales when consumer and business spending is strong than when it is weak.

On the other hand, when there are doubts about the future direction of the economy, companies and individuals will be more hesitant to spend money, preferring to "play it safe" until a better picture emerges.

When the economy slows down, companies realize they have overestimated their production needs and decide that they must be cut drastically.

Real examples

Stock Exchange

A strong Dow Jones or Nasdaq market in New York may suggest that earnings estimates increase. Therefore, the economy in general is preparing to prosper.

Conversely, a declining market may indicate that company profits are expected to decline and that the economy is headed for a recession.

Housing market

When sales decline, it generally indicates that values ​​will drop as well. For example, the collapse of the housing bubble in 2007 had serious effects on the economy and is widely blamed for driving the United States into a recession.

Gross domestic product

GDP is a key determinant of whether or not a country is entering a recession. The general rule of thumb is that when GDP shrinks for more than two quarters, a recession occurs.

Labor costs

Labor costs have been one of the largest and most controversial economic variables in the world. The discussion about it has led countless companies to turn to other countries in search of cheap labor.

Many countries have established call centers, factories and other production process buildings in South Asian nations. This is because they accept much lower wages.

Diseases

Although it is an outlier example, diseases could also be defined as economic variables.

Case in point: After the 2014 Ebola virus hit West Africa, the World Bank's Macroeconomics and Fiscal Policy area stepped in to help local governments fight the virus.

References

1. The Free Dictionary (2019). Economic Variable. Taken from: financial-dictionary.thefreedictionary.com.
2. Money Crashers (2019). List of 16 Major Leading & Lagging Economic Indicators. Taken from: moneycrashers.com.
3. Andrew Bloomenthal (2019). Macroeconomic Factor Definition. Investopedia. Taken from: investopedia.com.
4. Investing Answers (2019). Macroeconomic Factor. Taken from: investinganswers.com.
5. Cnbc (2019). Macro-economic factors of fundamental analysis. Taken from: cnbc.com.
6. My Accounting Course (2019). What are Economic Factors? Taken from: myaccountingcourse.com.