How does the macro economy affect your pocket?
We tell you everything you always wanted to know about economics and, especially, what ends up affecting your daily life
GDP, Inflation, deflation, CPI ... Every day we hear or read these words in the news, but most of the time we think that they have nothing to do with us or we simply do not understand them. What does have something to do with us is, for instance, not making ends meet because of excessive spending and, above all, rent increases.
Well, it's time for us to know those impossible words that are ultimately responsible for our monthly belt tightening, and not precisely because we have lost weight. Knowing a little more about macroeconomics is fundamental to understanding how we have got to the situation we are in, and to making better decisions. Here are the main concepts of the economy and the explanation of how they influence us.
A better understanding of the main economic terms will help us to understand a certain context and to take decisions that are more advantageous for our situation
Unemployment: This is the situation of the group of people of working age currently without a job. In Spain unemployment is 17.1% (comparisons are odious and there are more factors to take into account, but in the United States it is 4.4%, in Italy 11.2% and in the UK 4.2 %).
How does it affect us? Unemployment affects us, for instance, when we want to enter the working world and we do not get a job in accordance with our level of education, or below it. If this rate becomes chronic (known as structural unemployment), it would limit the growth potential of the economy, the pressure on wages and their inequality with price levels, leading to a loss of competitiveness and, above all, the labour and social exclusion of many people.
The macro economy affects our daily decisions and these, in turn, will determine the state of the economy in the long term
Inflation: This refers to the general increase in the prices of goods, services and productive factors within an economy. In Spain, the CPI (Consumer Price Index) of January (3%) accelerated more than one percentage point over December, reaching levels unseen since October 2012, when the increase was 3.5%. The reasons? The rise in electricity prices and the increase in fuel prices.
How does it affect us? We all suffer from inflation each day. The prices of consumer goods increase faster than wages (which are adjusted once or twice a year). If the rise in prices is not compensated by an increase in wages, we will find it more difficult to make ends meet.
But if wages rise too fast, a vicious circle results since employers, to compensate for this increase, sell their products more expensively (those rising the fastest will be those of the highest consumption), so inflation will continue.
Consumer goods prices rise faster than salaries, which are adjusted once or twice a year
Exchange rate: The price of a currency measured in units of another. This rate fluctuates according to the difference between the interest rates and inflation rates in the two countries.
How does it affect us? When our currency is devalued, the goods that we import from abroad become more expensive; it is more expensive to buy, for example, that shirt that we like so much that it is sold on a website in the United States. The positive thing is that the devaluation of a currency helps the exporting companies to gain competitiveness on the international market, since their products are sold cheaper abroad.
Interest rate: It is the price of the money or the amount paid by a person requesting temporary availability of an amount in the form of credit, a loan or a financial obligation. The credit institutions apply passive interest, which is paid for taking money, and active interest, which is charged when lending it.
How does it affect us? In recent years we have become accustomed to living with unusually low interest rates, both in Europe and in the United States. The situation could change if the Federal Reserve (Fed), responsible for regulating the price of money in the US, changes its plan.
The central banks of each country, the European Central Bank in the case of the states of the European Union, are responsible for setting these rates in line with the economic situation (consumption, mainly) and the interest rates. A rise in rates slows inflationary pressures: the higher the cost of our financing, the less we spend and the less we become indebted.
A rise in rates usually translates into an increase in the currency quotation, which affects exporting capacity because our products will be more expensive
GDP: The Gross Domestic Product is the value of all goods and services produced in a country's economy over a period of time, usually a quarter or a year. This value shows how the economy is behaving: whether it is growing or shrinking.
How does it affect us? As Leopoldo Abadía explains in Economics for Dummies, "a high GDP not only means that a large mass of people can boast having a car and change it like they change their shirts, but also means better medical care or higher quality public education".
From "I" to "we"
It has been made clear that macroeconomics affects our life, and our pockets; but that our daily life affects macroeconomics has too. As investors, macroeconomics will help us decide. Macroeconomic uncertainty, just like stability, affects the stock market and increases or decreases the risks of our investments. We will invest based on our propensity or aversion to risk.
When we make the shopping list and assess our budget, we will also be interested to know whether the economic situation will improve or worsen during the next months. We will not consume the same if we think that a crisis can affect us individually than if we believe that we can benefit from a moment of prosperity.
In short, by changing from "I" to "we" when making economic decisions, we will improve not only our finances but the economy as a whole, and this will also benefit us in the end.
By Romina Vallés