Many forex traders and investors ask me which is the best 3 macroeconomic variables when trading. After careful analysis, it was found that the 3 best are interest rate, inflation, and government spending. These are the main economic factors that play a great role in determining whether a country will succeed or not. Let's take a closer look at each macroeconomic variable.
Interest Rate: The interest rate is the most important macroeconomic variable to watch. It is largely concerned with short-term debt and long term debt. Long term debt usually refers to a country's foreign trade. In short, the interest rate basically tells us how much money a government or a business can borrow to generate more income.
Inflation: This is another important macroeconomic variable to look into. Inflation basically deals with the rise of prices across the board. Price level is closely tied with consumer demand. If there is a rise in the demand, then the price of the commodities would also rise. Thus, inflation essentially deals with the rise of the cost of living.
Government Spending: There are 2 economic factors which include the total economic spending by the government. One of these factors is the central budget. The other factor is the domestic spending, which includes subsidies and grants. The central budget and the domestic spending form the major two macroeconomic variables. Let's have a more detailed analysis on these two factors.
Federal Budget: The budget is basically a proposal for the spending of the national treasury. The head of the government decides the spending pattern for the future years. Thus, we can say that this element of macroeconomic planning is very important. The federal budget decides on long term economic policies which will be implemented for the medium term as well.
Consumer Price Index: This is the prime economic variable which is affected by a lot of indirect variables. In fact, this element is the most important of all the macroeconomic indicators. Consumer Price Index (CPI) measures the increase of the price of commodities depending upon the demands and supply. This is an indirect result of the demand and supply policies. It is a part of the indirect economic base which is called personal income factor.
Government Spending: We know that the central government spends the money to support its programs and services. It determines the level of taxation for the regulation of economic activities. In fact, the main role of government spending is to regulate private economic variables. This element of government spending directly influences the inflation of the economy. Hence, we can say that government spending is a key driver of the economy.
The growth of economy is closely associated with . . . . . . the fiscal policy. We can take help from fiscal policy in determining the spending patterns of the government. There are several factors such as trade balance, currency exchange rates, inflation, budget deficit, balance of payments and international payments. All these elements of the macro-economic variables are essential to monitor the economic standing of the country.