17.2 Macroeconomic Indicators

For an organization that expands internationally, it is important that they analyze macroeconomic performance of their domestic economy with the economy of countries they wish to trade. This will help the company to choose a trade partner whose growth and performance aligns best with their own country which further facilitates smooth and long run trade relationships.

In trade finance, macroeconomic models highlight the relationships among economic variables such as gross domestic product (GDP), unemployment, inflation, trade balances, exchange rates, and interest rates.

• Gross domestic product (GDP) is known widely as an indicator to analyze macroeconomic performance. Economists generally express the size of a nation’s economy as its GDP, which measures the value of the output of all goods and services produced within the country in a year. Forecasters use this indicator as a tool to measure a country’s economic performance.
• Balance of trade reflects impacts of international trade on an economy’s GDP. High exports indicate a growth in nation’s GDP whereas high imports are an indication of decreased GDP. U.S. and Canada have experiences trade deficits over years whereas China produces and exports most of the world’s consumable products and as such has recorded a trade surplus since 1995 (Brock, 2019).
• The unemployment rate helps inform financial forecasters about the expected cost of labor and the ability of employers to hire people if a firm plans to increase the production of goods or services. The unemployment rate measures the percentage of the working population in a country who would like to be working but are currently unemployed. The lower the rate, the healthier the economy and vice versa.
• Inflation is the rate of change of prices in the entire economy. Every quarter, financial information hubs, such as the Wall Street Journal (WSJ), and government agencies and regulatory bodies, such as the U.S. Treasury Department and the Federal Reserve, release estimates about expected and current inflation. This information informs policymakers how to adjust the money supply to meet particular targets.
• Financial forecasters pay close attention to current and expected interest rates, as they have a fundamental impact on the cost of raising money and determining the required rate of return for investment. Economists also believe that high interest rate attract investment from other countries and injects instant capital inflow in short run (Pugel, 2020).

Countries interact in two important ways: trade and investment. Trade encompasses the export and import of goods and services. Investment involves the borrowing and lending of money and the foreign ownership of property and stock within a country. Important international macroeconomic variables, then, are the balance of payment, which measures the difference between the total value of exports and the total value of imports, international financial flows, and the exchange rate, which measures the number of units of one currency that exchanges for one unit of another currency.

Chapter 18 provides details on exchange rates and trade finance.

References

Brock, J. (2019, July 19). How international trade correlates to gross domestic product. PCB Blog. https://www.pcbusa.com/post/international-trade-gross-domestic-product

Pugel, T. A. (2020). International economics, (17th ed.). McGraw-Hill.