Measuring a Nation’s Income

When you finish school and start looking for a full-time job, your experience will, to a large extent be shaped by prevailing economic conditions. In some years, firms throughout the economy are expanding their production of goods and services, employment is rising, and jobs are easy to find In other years firms are cutting back production, employment is declining, and finding a good job takes a long time. Not surprisingly, any college graduate would rather enter the labor force in a year of economic expansion than in a year of economic contraction Because the condition of the overall economy profoundly affects all of us, changes in economic conditions are widely reported by the media. Indeed, it is hard to pick up a newspaper without seeing some newly reported statistic about the economy. The statistic might measure the total income of everyone in the economy (GDP) rate at which average prices are rising (inflation), the percentage of the labor force that is out of work (unemployment), total spending at stores (retail sales), or the imbalance of trade between the United States and the rest of the world (the trade deficit) All these statistics are macroeconomic. Rather than telling us about a particular household or firm, they tell us something about the entire economy As you may recall from Chapter 2, economics is divided into two branches: microeconomics and macroeconomics. Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets. Macro economics is the study of the economy as a whole. The goal of macroeconomics is to explain the economic changes that affect many households firms, and markets simultaneously, Macro economists address diverse questions: Why is average income high in some countries while it is low in others? Why do prices rise rapidly in some periods of time while they are more stable in other periods? Why do production and employment expand in some years and contract in others? What, if anything, can the government do to promote rapid growth in incomes, low inflation, and stable employment? These questions are all macroeconomic in nature because they concern the workings of the entire economy Because the economy as a whole is just a collection of many households and many firms interacting in many markets, microeconomics and macroeconomics are closely linked. The basic tools of supply and demand, for instance, are as central to macroeconomic analysis as they are to micro economic analysis. Yet studying the economy in its entirety raises some new and intriguing challenges. In this and the next chapter, we discuss some of the data that economists and policymakers use to monitor the performance of the overall economy. These data reflect the economic changes that macro economists try to explain. This chapter considers gross domestic product. or simply GDP, which measures the total income of a nation. GDP is the most closely watched economic statistic because it is thought to be the best single measure of a society’s economic well-being.

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