- Macroeconomic overview:
- Government role within macroeconomy:
- GDP measured by components of demand:
- Trade balance:
- GDP overview:
- Limitations of GDP as a measure of the standard of living:
- Macroeconomic overview:
Macroeconomics focuses on the economy as a while, or on the whole economies as they interact. Macroeconomics involves adding up all the economic activity of all households and all businesses in all markets to get the overall supply and demand in the economy.
Thinking about the overall health of the macroeconomy, it is useful to consider three primary goals: economic growth, low unemployment, and low inflation.
Economic growth determines the standard of living within a nation. A growth rate of more than 3% is considered good.
Unemployment, as measured by the unemployment rate, is the percentage of people in the labour force who do not have a job. When people lack jobs, the economy is wasting precious labour resources, and as a result lower goods and services are produced. Unemployment, however, is more than static, it represents peoples livelihoods. While measured unemployment is unlikely to ever be zero, a measured unemployment rate of 5% is considered low.
Inflation is the sustained increase in the overall price level. This is measured by the CPI. Low inflation, rates around 1-2%, is a major goal.
- Government role within macroeconomy:
National governments have two tools for influencing the macroeconomy. This is monetary policy, the second is fiscal policy.
Macroeconomics: overall economy is measured by GDP, which is the value of all final goods and services produced within a country in a given year. Each of the market transactions that enter into GDP must involve a buyer and a seller. GDP can be measured by the total dollar value, of what is purchased in the economy, or by the total dollar value of what is produced.
- GDP measured by components of demand:
- Demand can be divided into four main parts: consumer spending, business spending, government spending on goods and services, and spending on net exports.
- In calculation of GDP, the word investment does not refer to the purchase of stocks and bonds, or the trading of financial assets. It instead, refers to the purchase of new capital goods, that is, new commercial real estate, equipment, residential housing construction, and inventories.
Consumption expenditure by household is the largest component of GDP, accounting for about two-thirds of GDP in any given year. This tells us that consumers spending decisions are a major driver of the economy, however, consumer spending is a gentle elephant: when viewed over time, it does not jump around too much.
Investment expenditure refers to purchase of plants, equipment, primarily by businesses. Investment demand is far smaller than consumption demand, typically accounting for 15-18% of GDP. This is very important for the economy because this is where jobs are created. Business investment is volatile, new technology or a new product can spur business investment, but confidence can drop, and business investment call pull back.
Government expenditure in the US is about 20% of GDP, includes spending from all three levels of government. The part of government spending counted in demand is government purchases of goods and services produced in the economy.
- Trade balance:
The gap between exports and imports is called the trade balance. If the country’s exports are larger than imports, a country is said to have a trade surplus. If imports have exceeded exports, then a country is said to have a trade deficit.
By far, the largest part of GDP is services. Services have been a growing share of GDP over time. A breakdown of leading service industries includes healthcare, education & legal/financial services.
- GDP overview:
A significant decline in real GDP is a recession. An especially lengthy & deep recession is called a depression.
Real GDP is vital because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment.
GDP per capita: The US economy has the largest GDP in the world. The US is also a populous country, in fact, it is the third largest country by population in the world. GDP per capita is the GDP divided by the population.
The level of GDP per capita clearly captures some of the “standard of living”. Most of migration in the world, for example, involves people who are moving from countries, with low GDP per capita to countries with high GDP per capita.
- Limitations of GDP as a measure of the standard of living:
Standard of living is a broader term that GDP. Whilst GDP focuses on production that is brought and sold in markets, standard of living includes all elements that affect peoples well-being, whether they are brought and sold in the market or not.
There is a difference between an economy that is large because people work long hours, and an economy that is just as large because people are more productive with their time, so they do not have to work as many hours. Not necessarily true that higher GDP equates to higher standard of living. GDP does not measure factors such as actual levels of environmental cleanliness, health, and learning. GDP does not address if life expectancy or infant morality have risen or fallen, or it does not address how much of the population can read, write, or do basic maths.
It is theoretically possible that whilst GDP is rising, the standard of living could be falling if human health, environmental cleanliness, and other factors that are not included in GDP are worsening.
However, others argue that a rise in GDP understates the actual rise in the standard of living. Because GDP does not capture leisure, health, cleaner environment, the possibilities created b new technologies, or an increase in variety, the actual rise in the standard of living for Americans in recent decades has exceeded the rise in GDP.
However, GDP ignores other factors, such as crime rates, inequality of incomes or levels of traffic. Therefore, argument to be made that GDP could overstate the true rise in the standard of living.
