[SOUND] In this module, we start with the definition of Key Macroeconomic Variables. Here's the list of the main macroeconomic variables you will be examining in this course. Gross Domestic Product, or GDP, Unemployment Rate, Inflation Rate, Interest Rate, and Exchange Rate. Here are the symbols for the key macroeconomic variables that we will be discussing in this course. Y stands for real GDP. U stands for unemployment rate. P stands for the aggregate price level. Pi is the inflation rate, rate of growth of p. Nominal interest rate is going to be shown by i. And finally, the exchange rate is going to be shown by the lowercase e. Before we get into the definition of variables and how they're measured etc., let me remind you of some simple mathematical relationships that are going to be very helpful in our analysis. First it's very common in macroeconomics that the variable is the ratio of two other variables. For example GDP per capita is the ratio of GDP of the economy, total gross domestic product, divided by the population. So, what you want to know is that if we have such a variable, what's the relationship of its growth rate, with the growth rates of the numerator and the denominator? And if we have such a variable, then it's very easy to show that the growth rate of the left-hand side, the ratio, which is I'm going to show with the lowercase z, is approximately equal to the difference between the growth rate of the numerator and the growth rate of the denominator, lowercase x minus lowercase y. For example, let's say the price level is measured by the consumer price index, CPI. And let's say that N is the level of nominal income, and little n is the growth rate of nominal income. In that case real income, whether you're talking about real income of a country or real income of a household is equal to the nominal income divided by the price level, the price of the basket of goods that they're consuming. Then if you want to see how much their real income grows from one year to the next, the real income growth is going to be lowercase y equal to the growth rate of the numerator, little n minus the growth rate of the price level, which is inflation rate. In this way with a very simple calculation, we can figure out the growth rate of real income, if you know how much nominal income has gone up and what's the inflation rate. Rather than dividing we use subtraction. Another example is the real wage rate. You know your nominal wage rate wherever you work. If you want to know whether your real wage has gone up or down, you need to scale it by this consumer price index. Now if you want to know the growth rate of your real wage, it's very easy. You look at the nominal wage growth and you simply subtract the inflation rate from it, and that approximately gives you the real wage growth. As for the sources of data for the variables that we will be discussing in this course, if you are interested in the data for the United States, a very accessible source of data is Federal Reserve Bank of St. Louis. The Federal Reserve Economic Data, or FRED, and here's the website. Another source is Bureau of Economic Analysis. And a third source, a very important source is Bureau of Labor Statistics and that's it's website. For international data a very good data source is World Bank's data bank or World dataBank. That's the website for this one. International monetary fund It also has an important source of data from macroeconomic variables. And there's another site which puts together quite a few variables beyond simple or straight forward macroeconomic variables in much more diversative indicators and that's grown against growth and development center database and that's their website. Now, let's turn to the definition of the schematic and algebraic variables we're interested in. First, the exchange rate, that's intact the first variable that we'll be analyzing in later modules. For now, let me just provide you with a definition of this variable. The exchange rate is the number of foreign currency units you get for one unit of your home currency. Whenever you want to define the exchange rate, think about the country that you can take as your home country, and then find the exchange rate of the currency of that country vis a vis the currency of other countries in terms of. How many units of foreign currency do you get for one unit of domestic currency? The exchange rate can be defined the other way around too. You can think about how many domestic foreign currency units you have to give in order to get one unit of foreign currency. In fact, in many developing countries, this is very common that they think about the price of $1 in terms of their home currency. But that could cause confusion in the analysis if you're not clear which way we're defining the exchange rate. Both ways are correct. It's just matter of using a convention that avoids confusion later on when I say the exchange rate goes up or down. So, we're going to stick to this definition of one unit of domestic currency being valued in terms of foreign currency. For example, if the home currency is US dollar and we want to know the exchanger rate with the yen, we right it this way. e, the exchange rate, is equal to, let's say, 120 yen per dollar. Or if the home currency is the dollar and we want to know the exchange rate to the euro, then we write e equal to, let's say, 0.9 euro per dollar. More on this later. The next variable to define is, which again we will be discussing in a later module in much more detail and see how it's determined, is the interest rate. The interest rate is the price of using money or any other financial asset in the activities that you want engage in. The interest rate is defined, the return as a percentage of the principal that you're using in our economic activities or you choose to hold. There's no single interest rate in the economy, in fact there are millions of interest rates. Depending on the date, depending on the place, depending on the type of transaction, who the borrower is ect. That's because interest rates include some risk and also local conditions matter for the interest rate. We won't be able to analyse all these interest rates in this course. You'll be using one interest rate as an index of the rest and then discuss any deviations of other interest rates from that benchmark interest rate whenever necessary. Our benchmark interest rate is going to be a short term, risk free interest rate like US Treasuries for example, one year US treasury bills. More on this again later.