Macroeconomic Forecast

Macroeconomic Forecast Outline

Macroeconomics is, “the part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measures of the total economy” (McConnell & Brue, p.13). “Two of the most critical questions in macroeconomics are: (1) What determines the level of GDP, given a nation’s production capacity? (2) What causes real GDP to rise in one period and to fall in another?” (McConnell & Brue, p.72).

So how do economists measure the economy as a whole? What are the indicators and variables they measure? Where are the forecasts obtained? And what historical data do they use? The paper will list these indicators and variables, including the importance and types of historical data.

The Economic Indicators

• Net domestic product (NDP) is the result of GDP less consumption of fixed capital or depreciation. According to our text, “it measures the total annual output that the entire economy, including households, businesses, government, and foreigners and can consume without impairing its capacity to produce in ensuing years” (McConnell & Brue, p. 120).

• Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS), is the main measure of inflation in the United States. The index is used by the government to report monthly and annual inflation rates as well as to adjust Social Security benefits and income tax brackets. (McConnell & Brue, p. 141)

• U.S. national income (NI) includes all income earned through the use of American-owned resources, whether they are located at home or abroad. NI is calculated by subtracting net foreign factor income from NDP and subtracting indirect business taxes from NDP. (McConnell & Brue, p.120)

“Disposable income (DI) is personal income less personal taxes. Personal taxes include personal income taxes, personal property taxes, and inheritance taxes. Disposable income is the amount of income that households have left over after paying their personal taxes” (McConnell & Brue, p.121).

Personal consumption expenditures by a household:

• Durable consumer goods such as automobiles and appliances (small or large).

• Nondurable consumer goods such as food and personal hygiene items.

• Consumer expenditures for services of lawyers, doctors, carpenters, barbers, etc. (McConnell & Brue, p.115)

Forecasts sources

The available sources used to obtain macroeconomics forecasts are numerous. However, they can be divided into two categories; the official projections which are provided by the governmental entities (departments, agencies, or offices), and the non-official forecasts resulting from economical analysis conducted by consulting companies, association, research institutes, and journalists and published in papers or newspapers. Contrary to most of microeconomics forecasts, the macroeconomics projections are delivered free of charge.

The official macroeconomics projections are published through the Congressional Budget Office (CBO) of the US congress on a regular basis in the Budget and Economic Outlook report. The CBO's forecasts for the major macroeconomic variables cover 18 to 24 months. Further projections are extended out to 10 years. Nominal GDP, real GDP, GDP price index, consumer price index, and unemployment rate are a few examples of the indicators forecasted by the CBO.

Obviously, most of them are based on estimates coming from other governmental entities such as:

• Department of Commerce, the Bureau of Economic Analysis.

• Department of Labor, the Bureau of Labor Statistics.

• Federal Reserve Board.

The major mission of all these entities is to follow indicators by computing historical data. However, they usually conduct some studies or research to supply recommendations about the economic trends and projections. The CBO also receives inquiries related to specific events or emergency situations, such as the recent Hurricane Katrina where the CBO was requested to estimate the likely consequences for the national economy.

Other governmental sources of economic forecasts that should be mentioned are:

• Administration’s Office of Management and Budget (OMB) which provides baseline and policy budget projections and economics assumptions.

• US Treasury Department which conducts a real-time forecast of the GDP.