Macroeconomics is a part of our everyday lives. If the macroeconomy is doing well, few people do not have jobs who want one, people’s incomes are generally rising, and profits of corporations are generally high.
Macroeconomics focuses on the determinants of total national output, whereas microeconomics focuses on the factors that influence the production of particular products and the behavior of individual industries. Macroeconomics is concerned with the sum or aggregate of industries’ performance, including the consumption of all households in the economy, the amount of labor supplied and demanded by all individuals and firms, and the total amount of all goods and services produced.
Introduction to Macroeconomics
Macroeconomics was born out of the effort to explain the Great Depression of the 1930’s. Since that time, the discipline has evolved, concerning itself with new issues as the problems facing the economy have changed. Through the late 1960’s, it was believed that government could “fine-tune” the economy to keep it running on an even keel at all times. The poor economic performance of the 1970’s however, showed that fine-tuning does not always work.
There are three very important macroeconomic concerns. These include:
Inflation, an increase in the overall price level
Output growth, the short-term ups and downs in the economy
Unemployment, which is the percent of the labor force that is unemployed
Macroeconomics is concerned with both long-run trends and with short-run fluctuations in economic performance. Since 1970, the U.S. has seen three recessions and large fluctuations in the rate of inflation.
National Output and National IncomeGross Domestic Product (GDP) is the key concept in the national income and product accounts. It is the total market value of a country’s output, the market value of all final goods and services produced within a given period of time by factors of production located within a country.
Calculating GDP can be achieved in two ways:
by adding up the amount spent on all final goods during a given period (the expenditure approach), or
by adding up all the income received by all factors of production in producing final goods (the income approach). Either way, we should obtain the same total output.
There are other useful concepts besides GDP. They are:
- Gross National Product (GNP), GDP plus factor income earned by U.S. citizens from the rest of the world and subtracting factor income earned in the U.S. by foreigners
- NNP or Net National Product , which is GNP less depreciation
- National Income (NI), which is NNP less indirect business taxes plus subsidies
- Personal Income (PI), which is the total income of households, and is found by taking NI and subtracting corporate profits minus dividends and social insurance payments, and then adding personal interest income from the government and consumers and transfer payments made to persons
- Disposable Personal Income, which is PI after personal income taxes are paid
- Nominal GDP is GDP measured in current dollars, or the current prices we pay for things. This is not a desirable measure of production, because production could seem to increase when in fact only the price has increased. Calculating real GDP means using a geometric average over two base years and changing the base years used as the calculations move through time.
Serious problems arise when we try to use GDP as a measure of happiness or well-being. For example:
- Some changes in social welfare are not measured by GDP
- There is an underground economy that should be counted in GDP but is not, due to the fact that they are considered illegal activities or a result of tax evasion
- Per Capita GDP or GNP, which is divided by a country’s population, is a better measure of well-being for the average person than is total GDP or GNP
An ideal economy is one in which there is rapid growth of output per worker, low unemployment, and low inflation. There can be times of slow growth, however—high unemployment and high inflation.
Several macroeconomic concerns include:
A recession, which is a period where real GDP declines for at least two consecutive quarters
A depression, which is a prolonged and deep recession
Unemployment, which is the ratio of the number of unemployed people to the number of people in the labor force
One final macroeconomic concern is inflation. Inflation is an increase in the overall price level. It happens when many prices increase simultaneously. A deflation is a decrease in the overall price level. Whether a person gains or loses during a period of inflation depends on whether his or her income rises faster or slower than the prices of the things he or she buys.
