Often the central bank (BCRD) refers to macroeconomic stability. What does it mean and what implications does it have for the rest of the world? economic system or productive of the country? Why do people often complain that they talk about the macro, but nothing about the micro? Why are there complaints that prices are high, while the inflation published by the authorities, in relative terms, is low?
In simple language, due to the confusion these terms generate, it is feasible to tell the readers of elDinero that the economy is divided in two: Macroeconomy and microeconomics. The first deals with issues related to the global analysis of the economy, since it does not focus on the dynamics generated between two or more market agents. Its orientation is aimed at observing and analyzing the results on a large scale. Meanwhile, the second does deal with seeing how people and companies make decisions regarding the conditions of the economic environment.
Macroeconomics, on its side, sees more long-term growth, productivity, business cycles, unemployment and their effects on the economy; inflation and public accounts, among other variables, such as the behavior of the gross domestic product (GDP), exchange rates and inflation, external balance (deficit or surplus of the current account of the balance of payments) and international reserves.
A macroeconomic variable measures something, which could be the production or the behavior of an economic phenomenon. There are two: those of the “stock” type, which measure something at a specific moment in time, therefore it collects the accumulated value of what is measured. The other is of the “flow” type, which measures results over time. Here come the salary, income, savings, dividends, taxes. It could be said that this registers the variations or behavior of the “stock” type variables in a period.
One of the macroeconomic indicators that generates the most controversy is inflation, since it is uncomfortable to see this variable with a behavior that apparently does not correspond to reality. Why does it happen and how does it become less credible especially when prices are rising?
It should be noted that inflation is the result of a statistical exercise that is achieved with the consumer’s price index (IPC), which is made up, in the case of the Dominican Republic, of a basket of 364 items in regular demand by part of the population.
Just give the following example: If the banana unit went from RD$3.00 to RD$5.00 from one month to the next, it means that inflation in this product was 66.7%. It turns out that if it goes up again the following month, but it only does so by 25 cents (RD$5.25), then the CPI will show inflation of only 5%, since the calculation is made with respect to the previous level.
As can be seen, inflation dropped from 66.7% to 5%, but the price of bananas is still high. Now, if there is a reduction of RD$1.00, the following will happen: The CPI will mark a reduction in inflation of -19.01%, but in real terms the price of bananas will be higher than when its price was RD$3.00, since it would be RD$4.25.
Inflation, when negative for a prolonged period, becomes deflation and is just as damaging as periods of high prices. When there is no inflation, investment is discouraged and, as a consequence, there is a loss of jobs. Its effects are disastrous on the economy.
Periodically, the authorities disclose the behavior of GDP. This macroeconomic indicator, which is of the “stock” type, refers to the sum of all goods and services produced during a given period, usually a year. Here it is opportune to mention themonthly index of economic activity (IMAE), which measures the evolution of economic activity, approximating its monthly behavior of the added value of the different industries included in the GDP calculation. This variable establishes that in March it was 2.1% compared to the same month of the previous year, while in the first quarter (accumulated) it was 1.4% compared to the same period of 2022.
The exchange rate is another of the most important variables to take into account. It influences practically everything, especially the cost chain of the economy. Its movement, up or down, benefits or harms as the case may be. Uncontrolled devaluation generates inflation and, incidentally, decreases the purchasing power of money, which would generate worker protests for wage increases.
However, an increase in the exchange rate could also make sectors that generate foreign currency, those that are exporters of goods or services, more competitive. The issue here is that this devaluation should only be up to a “reasonably competitive” point, in order not to generate distortion in the other economic variables.
In short, as the Central Bank says in its mission, what is important in any case is to achieve price stability and guarantee efficient regulation of the financial system and the proper functioning of payment systems, acting as the issuer and executor of policies monetary, exchange and financial to help with the growth of the national economy.