77 The Macroeconomic Perspective
What you’ll learn to do: define macroeconomics and explain how economic indicators like GDP are used to assess the state of the economy
This section will help you understand what macroeconomics is and how it differs between microeconomics. You will also learn how economists use economic indicators like GDP, inflation, and unemployment rates to assess the health of an economy. A key distinction for understanding the state of an economy is the difference between nominal and real measurements.
Learning Objectives
- Define macroeconomics
- Identify the major economic indicators used to assess the state of the macroeconomy
How is the Economy Doing? How Can We Know?
The 1990s were boom years for the U.S. economy. The late 2000s, from 2007 to 2013 were not. What causes the economy to expand or contract? Why do businesses fail when they are making all the right decisions? Why do workers lose their jobs when they are hardworking and productive? Are bad economic times a failure of the market system? Are they a failure of the government?
These are all questions of macroeconomics, which we will begin to address in this module. We will not be able to answer all of these questions here, but we will start with the basics: How is the economy doing? How can we tell?
The macro economy includes all buying and selling, all production and consumption; everything that goes on in every market in the economy. The quest to measure the macro economy began more than 80 years ago, during the Great Depression. President Franklin D. Roosevelt and his economic advisers knew things were bad—but how could they express and measure just how bad it was? An economist named Simon Kuznets, who later won the Nobel Prize for his work, came up with a way to track what the entire economy is producing. The result—gross domestic product (GDP)—remains our basic measure of macroeconomic activity. In this module, you will learn how GDP is constructed, how it is used, and why it is so important.
Macroeconomics
Macroeconomics focuses on the economy as a whole (or on whole economies as they interact). It describes what causes recessions, and what makes unemployment stay high when recessions are supposed to be over. Macroeconomics addresses why some countries grow faster than others, and have higher standards of living than others. Macroeconomics involves adding up the economic activity of all households and all businesses in all markets to get the overall demand and supply in the economy. However, when we do that, something curious happens. It is not unusual that what results at the macro level is different from the sum of the microeconomic parts. Indeed, what seems sensible from a microeconomic point of view can have unexpected or counterproductive results at the macroeconomic level. If this were not the case, we wouldn’t need macroeconomics as a separate discipline and we could simply use microeconomics to study macroeconomic issues. We use the term macroeconomi