What are the main macroeconomics variables?

There are 4 main macroeconomic variables that policymakers should try and manage:

1) Balance of Payments
2) Inflation
3) Economic Growth
4) Unemployment

This can be easily remembered using the following acronym:

B: Balance of Payments
I: Inflation
G: (Economic) Growth
E: Employment

The Balance of Payments is the difference between the total amount of goods a country exports (sells to other countries) and the total amount of goods a country imports (buys from other countries). This can be simplified to X-M.

- If the amount of goods that a country exports (X) is greater than the amount of goods that a country imports (M), there is a balance of payments surplus because X>M.

- If the amount of goods that a country exports (X) is less than the amount of goods that a country imports (M), there is a balance of payments deficit because X.

Inflation is the amount that the cost of goods and services within an economy has increased over a given time period (usually measured over a year). In the UK, this is measured using the Consumer Price Index (CPI).

Inflation is damaging to an economy and this means that policymakers tend to try and keep inflation low.

Example
The Bank of England aim to set inflation at around 2%. There are 2 types of inflation:

1) Cost-push inflation - caused by the costs of production for firms increasing, forcing them to put their sale prices up.

2) Demand-pull inflation - caused by growing demand for goods that firms produce, allowing firms to increase prices to gain more profit.

Economic growth is the amount that the level of output within an economy increases over a given time period (again usually measured over a year). Economic growth is extremely desirable because it means that, in general, the people within an economy are getting richer.

Economic growth can be increased in a number of ways, such as technological improvement, an increase in the demand for goods and services, and an increase in the size of the workforce (a fall in unemployment).

Unemployment is the amount of people within an economy who are willing and able to work, but do not have a job. There are a number of different types of unemployment:

1) Frictional unemployment - caused by the search for a new job or a transition between jobs.

2) Structural unemployment - caused by the decline of an industry, e.g. type-writing or coal mining.

3) Seasonal unemployment - caused by the time of year, e.g. working on a Christmas tree farm is undesirable during summer.

4) Cyclical unemployment - caused by a recession (a reduction in the level of output within an economy).