Definition of Macroeconomics
Calculating GDP
Statistics & Policy
Macroeconomics - Overview
Macroeconomics is the study of how the economy as a
whole should function. In contrast to microeconomics,
focused on individuals and companies, macroeconomics
focuses on the large economic issues that face society.
Macroeconomics is more than just a study of large-scale
economic systems the aggregate economy, according
to economists. Macroeconomics at its core is debate
about modern philosophy it asks the age-old questions
about how society should operate.
Similar to classical philosophy, the study of
macroeconomics is based on constant questions Why is
something done? Who must bear the costs? Who
receives the benefits? What are the short-run and longrun effects?
Areas of Study
Macroeconomics covers more participants than studied in
microeconomics. While it examines people and
companies, it considers them as groups, not individuals.
The focus of macroeconomics is government policy the
legal system, fiscal policy (taxing and spending) and
monetary policy (money and banking) and how these
things affect companies and individuals.
In addition macroeconomics includes international
economics. The force of globalization have turned issues
of national economies into international issues
governments not only think about exchange rates and
trade in terms of globalization, but also levels of taxation,
spending and banking systems.
Macroeconomic Issues
Macroeconomics is primarily focused on three issues:
Economic Growth both creating opportunities for and
sustaining the growth of economies. The goal of
economic growth is not just to create more stuff, but to
improve peoples standard of living.
Unemployment reducing the economic and social
impact of involuntary unemployment. Economist view
involuntary unemployment as a waste of resources it is
time that wasted.
Inflation control the rate at which money loses its
value in terms of its purchasing power. Inflation robs
people of the value of their money and investments.
Y = C + I + G + NX
Measuring GDP
The Gross Domestic Product (GDP) is defined as the total
market value of the final goods and services produced within
the borders of a nation. This number is generally used as a
measure of the total size of an economy. The Gross National
Product (GNP) measures the total output of the citizens of a
country this measure is less used now because of issues of
globalization.
Economists generally focus on GDP because it represents
economic activity in a region, rather than a group of citizens
who might be working in several regions.
GDP is measured in both nominal and real, adjusted for
inflation amounts. Typically, economists pay more attention
to the Real GDP since it more accurately shows changes in
output since it factors out inflation.
Calculating GDP
The United States government
uses national income
accounting to measure GDP.
This method of calculation
involves adding up the total
value of all the final goods and
services produced within the
country in one year.
Source:
FRBSF 8/14
The Bureau of Economic Analysis calculates the GDP for the
United
States.
The current GDP for the United States about $ 17 trillion largest
economy in the world.
The growth of the economy is measured as a percentage of GDP. A
3% growth rate for the United States is a good rate of growth.
In its most recent quarter (Q2), the United States grew at an annual
rate of 4% (note the negative growth in Q1).
When making economic predictions economists look at the longterm trend of GDP growth and use that as the basis for future
forecasts. While the future can be different from the historical
trend, this historical trend provides a baseline by which to gauge
growth prospects. The graph below shows a trend line imposed on
historical GDP data.
GDP
(Y)
Consumption
(C)
Investment
(I)
Government
(G)
Net Exports
(NX)
1940
101.3
71.2
13.6
15.1
1.4
1950
294.3
192.7
54.1
46.9
0.7
1960
527.4
332.3
78.9
113.8
2.4
1970
1,039.7
648.9
152.4
237.1
1.2
1980
2,795.6
1,762.9
477.9
569.7
-14.0
1990
5,803.2
3,831.5
861.7
1,181.4
-71.4
2000
9,824.6
6,883.7
1,755.4
1,751.0
-365.5
2001
10,082.2
6,987.0
1,586.0
1,858.0
-348.9
2002
10,446.2
7,303.7
1,593.2
1,972.9
-423.6
Output Gap
Calculating Inflation
The way government calculates inflation is by calculating a
price index based on comparing the nominal prices for the
same basket of goods on different years. In this
calculation, one year is established as a base year and
changes in prices are measured against that year. The
index calculated is a percentage rate of inflation. This is
the equation:
Price Index =Price of Basket - specific year
* 100
Unemployment
Unemployment is a psychological, social and economic
problem. The economic problem is that it represents
economic resources (human labor) that are not being utilized,
which means that society is poorer than it otherwise would
have been.
Unemployment statistics are based on the number of people
in the labor force not the population. The Bureau of Labor
Statistics calculates the unemployment rate for the United
States based on interviews with 60,000 households. It sorts
the respondents into three categories:
Employed person who has a job
Unemployed did not have a job, but was actively looking.
Labor Force
Types of Unemployment
Economists divide unemployment into four categories.
Frictional unemployment created by people quitting
to find better jobs or employers fire people to find
better employees.
Seasonal unemployment caused by seasonal
variation in industries (i.e. life guards and ski
instructors)
Cyclical unemployment caused by changes in the
business cycle when cyclical unemployment is zero,
the economy is considered at full employment.
Coincidence Indicators
These statistics move in time with the business cycle
and are indicators of current change.
Employees on nonagricultural payrolls
Personal income
Index of industrial production
Manufacturing and trade sales
These statistics can be found on the web pages for the
Bureau of Labor Statistics and the Bureau or Economic
Analysis.
Lagging Indicators
These are indicators that follow behind the business cycle
and are useful for confirming that a change in economy
has happened i.e. past the worst point in a recession.