What is macroeconomic growth? It is defined as the rate at which an economy's price level is adjusted to the changes in the money supply, the interest rate, and the balance of trade. One can also define macroeconomic growth as an increase in the real price-income ratio of an economy over a period of time. Statisticians conventionally define this growth rate as the percentage of growth in real net domestic income, or real GDP per capita. Although these rates of growth are useful in analyzing a country's economy, they do not account for the complex factors that influence the economies of most economies.
Economic growth is a measure of the rate at which economic variables adjust to changes in their external environment. A good example of an external change that may affect an economy is a change in currency value. The two main types of external forces that affect the price level of an economy are changes in demand (a rise in consumer demand) and changes in supply (a rise in the production of goods or services). These factors have different effects on the economies of many countries, and macroeconomic growth is defined as the rate at which the economies adjust to these changes.
How is macroeconomic growth calculated? One of the simplest methods of measuring macroeconomic growth is to use data from the National Accounts. However, because there are so many variables that affect an economy, it can be difficult to make a standard measurement that will apply to all economies. Because this process is so difficult, many researchers prefer to use data from individual countries.
In the United States, there are currently two separate economic accounts used to measure growth: The U.S. Gross Domestic Product (GDP) and the United States National Income and Product Accounts (NIPA). These accounts allow researchers to create two different national-level macroeconomic growth models based on the data used in each account. Each model accounts for how factors such as income and population levels, changes in labor demand, and changes in exchange rates interact with changes in a country's financial assets and liabilities. To estimate how the macroeconomic model applied to a given economy would look in the absence of these factors, economists use statistical techniques known as instrumental variables.
One model, known as the Phillips Curve, estimates how income, population, consumption, and trade have an effect on economic activity by measuring changes in prices across a broad range of variables. Another model, known as the Stiglitz Model, evaluates the effects of changes in tax rates and monetary policy by comparing the changes in spending in economic activity with changes in both tax rates and changes in monetary policy. There are also models that evaluate the effects of monetary policy by considering changes in long-term interest rates and changes in the price levels of a country's currency. These models are generally referred to as “heteroscedastic” models, which mean that they use data on the variables on the curve . . . . . . to adjust for changes in the other variables and then calculate how changing those variables will alter economic activity.
Other ways of measuring macro economic growth include indicators derived from the National Accounts. For example, a measure of how the value of a currency falls or rises during recessions and recoveries is known as its “basis” rate. Similarly, changes in a country's fiscal position can be used to predict changes in its growth by using the “transition” rate, which is the difference between changes in GDP and the base rate after one year. Other indicators used to measure a country's growth include the unemployment rate and its gross domestic product (GDP), gross domestic investment (GDI), and gross national income (GNI).