Essential Economic Concepts: Macro and Micro Foundations

Macroeconomics: Understanding the Big Picture

Macroeconomics can be defined as that branch of economic analysis which studies the behavior of not one particular unit, but of all the units combined together. Like the study of a forest, it studies economic phenomena from the perspective of the entire economy or a particular sector of the economy.

Microeconomics: Focus on Individual Entities

Microeconomics, like the study of a tree, studies economic phenomena from the perspective of individual entities.

Economic Growth: Driving National Prosperity

Economic growth is the increase in the goods and services produced by an economy, typically a nation, over a long period of time. It enables wage and income earners, producers, and even macroeconomic planners to take appropriate, proactive measures to mitigate any negative effects of a major change in the direction of the economy.

Measuring Economic Activity: Income and Expenditure

The Income Approach to National Income

The income approach measures the total income that is earned by all households in a nation. The factors of production include:

• Land
• Labor
• Capital
• Entrepreneurship

Each of these factors of production is exchanged for a corresponding source of income.

The Expenditure Approach to National Income

The expenditure approach measures the total amount of spending on goods and services that are produced within the domestic borders of the nation by households. Economic decision-makers within our economy include households, firms, governments, and foreigners. The spending directly connected with each of these decision-makers includes:

• Consumption
• Investment
• Government spending
• Exports

Inflation: Impact on Prices and Value

Inflation occurs when the economy grows so rapidly that it pushes all prices significantly and for a prolonged period above the actual utility value of goods and services. Inflation is particularly detrimental to the economy because it affects everybody and all segments of the economy, distorting prices and undermining the clear relationship that must exist between value and price—the very basis of market exchange.

Gross National Product (GNP) and Gross Domestic Product (GDP)

Gross National Product (GNP) Explained

Gross National Product (GNP) is an estimate of the total value of all the final products and services produced in a given period by means of production owned by a country's residents.

GNP vs. GDP: Key Differences

The difference between GDP and GNP is that GNP is obtained with labor or capital owned by the residents of a country, while GDP is the total product obtained with labor or capital located within the country.

Unemployment and Price Levels: Key Economic Concerns

Minimizing Unemployment

Ensuring full employment for its citizens is one of the primary goals of any government. The best way to alleviate poverty is to provide gainful employment to the poor. Minimizing the unemployment rate is an accepted goal of macroeconomic policy. The unemployment rate is defined as the percentage of the labor force that is unemployed in an economy.

Understanding Price Level Movements

Movements in the price level are of great concern to policymakers and ordinary citizens. Prices determine the purchasing power of money incomes and hence have serious implications for living standards.