Macroeconomics: Key Concepts and Indicators
Macroeconomics studies the performance of the entire economy. It deals with the economy as a whole, while microeconomics studies the behavior of individual markets, prices, and products.
Key Macroeconomic Variables
- Gross Domestic Product (GDP): Measures total production.
- Consumer Price Index (CPI): Indicates the evolution of prices and inflation.
- Activity, Unemployment, and Occupancy Rates: Indicate a country’s employment situation.
Economic Indicators
- Controlled inflation allows families to manage their finances more easily.
- Falling unemployment rates lead to increased family income.
- Economic growth increases the output of goods and services.
Gross Domestic Product (GDP)
GDP is the monetary value of all final goods and services produced by a country (by domestic or foreign companies) over a period, usually one year.
Features of GDP
- It follows a monetary standard.
- It only takes into account declared activities. Only transactions in goods and services declared to the public administration are included. Illegal operations, voluntary work, or barter, for example, are excluded.
- It refers only to the value of final goods, as the value of intermediate goods is included in the final product’s price.
- It measures the value of what is produced within a country’s borders. Whether produced by domestic or foreign entities, it contributes to the country’s GDP.
- It refers to what is produced in a given period, usually one year.
Nominal GDP vs. Real GDP
The monetary value of a good or service (its price) varies with time, even though the good or service remains the same. Nominal GDP is obtained by multiplying the quantity of final goods and services by their prices in the given year. Since the economy is subject to inflation, we must eliminate the effect of inflation to make valid comparisons between different periods. Real GDP is also calculated using the quantities of goods and services in a given year but, unlike nominal GDP, it is multiplied by the prices of a *base year* used as a reference.
Prices can be classified as:
- Current Prices: Prices of the year, including inflation.
- Constant Prices: Base or reference year prices, excluding inflation.
Related Macroeconomic Concepts
- GDP: Production within the country by both domestic and foreign factors.
- GNP (Gross National Product): The value of all final goods and services produced by *national* factors of an economy, both within and outside its borders, in a given period (usually one year).
- National Income: Wages and salaries + rents + interest + profits and state grants.
- Personal Income: National income – indirect taxes (VAT) – retained earnings – social contributions (social security) + state transfers (unemployment benefits).
- Disposable Income: Personal income – direct taxes (income tax). This is the income available to families for spending and saving.
When the term “per capita” is added to a variable, we are dividing the macro-variable by the number of inhabitants of the country. For example, personal income per capita represents the personal income corresponding to each inhabitant of the country.