Basics of Macroeconomics - Part 1: GDP and Unemployment Rate

Series “Basics of Macroeconomics”

Macroeconomics is an extremely important aspect that helps investors gain a deep understanding of overall economic activity and how macroeconomic policies affect investment opportunities. However, mastering the indicators and clearly understanding the impact of macroeconomic factors is not always easy, especially for those without a basic economics background.

Similar to the "Understanding Financial Reports" series that helps readers get a summary assessment of a business's financial situation and future prospects, the series on “Basics of Macroeconomics” will guide readers to better understand some basic macroeconomic indicators and how to apply this information in practice.

The first article in the series will explore the two most important factors in macroeconomics: GDP and unemployment rate.

1. GDP Indicator (Gross Domestic Product)

GDP (Gross Domestic Product), also known as gross domestic product — measures the market value of all final goods and services final produced within the territory of a country over a specific period (usually one year).

• The indirect GDP calculation formula based on expenditure:

Where:

• C (Consumption): Household consumption.

• G (Government Expenditures): Government spending.

• I (Investment): Investment.

• NX (Net Exports): Total export value - import value.

FYI: GDP differs from GNP (Gross National Product)

• GDP only counts domestic income (income from domestic factors)…

• … while GNP (gross national product) is national income from both domestic and foreign factors.

  => GNP = GDP + PI(R) - PI(P) = GDP + NPI

  • PI(R): income of residents from abroad

    • for example, you in Viet Nam invest in the US and receive money back to VN => it is counted in Viet Nam's GNP.

  • PI(P): income of foreign entities in the domestic territory

    • E.g.: a person with US citizenship / living in the US but investing profitably in Vietnam and transferring back to the US => this amount will be deducted when calculating Vietnam's GNP

  • NPI = PI(R) - PI(P): net income from abroad

GNP reflects the actual income of a country (the real money put into the country's pocket)….

… but GDP reflects the economic potential of a country (the potential to earn money from that country)!

GDP Classification:

1. Nominal GDP

Nominal GDP is the gross domestic product calculated at current market prices (not adjusted for inflation).

• Some reasons for increasing nominal GDP:

  • Increase in personal and business spending.

  • Increase in government spending.

  • Increase in prices => causes spending to increase

  • Increase in goods production => promotes export growth and spending (but spending may be affected by falling goods prices)

  • Changes in the domestic currency exchange rate => promote exports or reduce imports

2. Real GDP

Real GDP (real GDP) is an indicator determined based on gross domestic product already adjusted for the inflation rate.

• Formula:

→ If inflation is positive, Real GDP will be lower than Nominal GDP.

(...and real GDP growth will also be lower than nominal GDP growth). 

3. GDP per capita

Also known as GDP per capita, measures the average output or income per person in the economy over one year.

• Formula:

• GDP per capita has a positive relationship with the income level and living standards of the people in that country.

Meaning of GDP indicators

• GDP shows the economic potential (consumption, investment, and production) of a country (as a unified bloc).

• However GDP per capita (GDP per capita) shows the prosperity of each individual and the purchasing power of the people.

Example:

• The US is the “richest” country in the world with projected GDP reaching USD 26,900 billion in 2023.

• But Luxembourg residents are the “richest” people in the world with average income USD 126,595/person/year (2022 data) - Statistica.

  

Looking at IMF's 2023 global GDP statistics

• US GDP in 2023 is projected to reach 26.9 trillion USD, the highest in the world.

• IMF forecasts world economic growth at 5.3% y/y (Nominal GDP) - not adjusted for inflation.

• However, when adjusted for inflation, expected GDP growth is only 2.8% y/y (Real GDP).

2. Unemployment Rate (Unemployment Rate)

2.1. Unemployment Rate (Unemployment Rate)

• Measures the percentage (%) of a country's workers who do not have jobs and are seeking jobs.

• The “unemployed” are defined as people who do not have jobs, but are trying to find jobs.

→ Workers without jobs but also not trying to find jobs (discouraged workers) will not affect the unemployment rate.

The significance of the unemployment rate for the economy:

• Impact on the welfare of the unemployed: High unemployment rate ~ People have no income and must receive subsidies => cost burden on the people themselves and the economy.

  • Low unemployment rate, on the other hand, is a good signal. But in a high inflation environment, low unemployment can lead to persistent inflation.

• Signal that the economy is not using human resources efficiently. When this indicator continuously increases, it may be a sign of economic recession.

• Reflects Supply - Demand in the labor market: Low unemployment rate may indicate a labor shortage compared to business needs. High unemployment rate reflects the opposite.

2.2. Labor force (Labor force)

Is the total number of workers capable of working in an economy.

• represents the supply of the labor market.

→ Groups not included in the labor force:

• housewives, children, retirees..., (subjects not actively seeking jobs)

• disabled people,... (subjects without/limited ability to work)

2.3. Labor force participation rate (Participation rate)

• Measures the participation of the working-age population in the labor market.

• Indicates the level of utilization of labor potential of a country in working age.

Impact on the market:

• Helps analyze the potential of the labor market: labor availability of the supply in the market

• Often considered a more reliable indicator than the unemployment rate:

  labor force participation rate + unemployment rate => helps better understand the reality of the job market.

• Relying only on the unemployment rate can lead to misunderstanding about the number of people without income. Some retirees using savings may not be active in the labor market but still contribute positively to the economy.

Some important labor reports to follow

​​1. JOLTs Job Openings (Job Openings and Labor Turnover Survey)

JOLTS (Job Openings and Labor Turnover Survey) statistics the number of job openings, unemployment rate, and labor force turnover in the economy.

• JOLTS survey released monthly by region and sector, including the following information:

  • Number of new jobs each month.

  • Number of new hires each month.

  • Number of quits each month.

  • Number of layoffs each month.

Impact on the market

• JOLTS job openings increase: Businesses have higher hiring demand,

  • But high labor demand can push wages higher → Potential inflation risk.

• JOLTS job openings decrease: Businesses reduce hiring demand, increasing unemployment rate

  → Could lead to recession…

• Actual data higher than forecast will cause USD to rise, gold price to fall.

2. ISM Non-Manufacturing Employment (ISM Non-Manufacturing Employment Statistics)

ISM Non-Manufacturing Employment Statistics measures hiring activity in the non-manufacturing sector (services, retail, finance, healthcare, education, transportation,...)

• An increase in service sector jobs is often a positive sign of consumer demand and prosperity (as demand for services and entertainment usually follows essential needs).

• Companies in these sectors increasing staff will lead to expanded job opportunities and reduced unemployment rate.

• Actual data higher than forecast will cause USD to rise, gold price to fall.

3. Nonfarm Payrolls (Nonfarm Payrolls)

Nonfarm Payrolls measure the number of jobs created in all sectors except agriculture, but are calculated based on payrolls.

• Therefore, this statistic often has issues when workers have more than 1 job.

• Nonfarm Payrolls are reported monthly.

• Actual data higher than forecast will cause USD to rise, gold price to fall.

4. Initial Jobless Claims (Initial Unemployment Claims Report)

Initial Jobless Claims measures the number of individuals first time filing for unemployment insurance in the past week.

• Data released at 08:30AM every Friday.

• When the number of initial unemployment claims increases, it is often interpreted as poor labor market conditions and may raise concerns about the health of the economy.

Conclusion

GDP and unemployment rate are the two primary and most important indicators when analyzing a country's economy. These indicators reflect economic strength and development potential. Unemployment rate and GDP are also key indicators for assessing recession. Additionally, the unemployment rate is an important factor in the central bank's macroeconomic model:

• Related articles: What is the basis for the Fed's interest rate decisions? (end of the article)

Subsequent parts of the series Basic Macroeconomics will provide more diverse analysis tools to give a more comprehensive view of a country's financial and economic situation. This information will help investors have a clearer and more strategic perspective when making investment and financial decisions.