Understanding Macroeconomics: National Income and Policy
Macroeconomics: An Overview
Macroeconomics focuses on the overall performance of an economic system. It aims to study economic reality globally, considering variables such as:
- Total output of an economy (production)
- Employment
- Investment
- Consumption
- The general price level
Macroeconomics provides a simplified view of how the economy functions as a whole.
Macroeconomic Policy
Macroeconomics analyzes economic performance by focusing on key variables to set specific goals and design macroeconomic policy. Macroeconomic policy encompasses all governmental actions designed to influence the progress of the economy. The ultimate objectives of economic policy generally include:
- Inflation control
- Unemployment reduction
- Economic growth
Policymakers also pay attention to the national budget and accounts with the foreign sector.
National Accounts: National Product
National accounts aim to deliver quantitative information on major economic aggregates related to the generation of product and the use of income. This constitutes a fundamental element in any evaluation of economic policy.
The Product or National Income
Of the different aggregates shown in national accounts, the most significant is the product or national income. National income is the total value of all final goods and services produced in a year by an economy. Intermediate goods and services used in production are excluded.
Circular Flow of Income
The circular flow of income represents the payments companies make to families in exchange for labor and other factors of production, and the flow of family payments to companies in exchange for goods and services. National income can be calculated in two ways:
- Expenditure Approach: Adding up total consumer spending on final goods and services.
- Production Approach: Adding the total rent paid by business owners for factors of production.
National Product: Nominal and Real
- Nominal: Not adjusted for the effects of price growth (inflation).
- Real: Adjusted to eliminate the effects of price growth.
Nominal national product is measured at current prices during the production period, while real national product is measured at the prices existing in a specific base year.
Major National Accounts Aggregates
- Private consumption (durables, perishables, and services)
- Public services (defense, health, justice, education, etc.)
- Investments
- Private:
- Investment in plant and equipment by companies
- Residential construction
- Changes in inventories
- Private:
- Net exports (exports minus imports)
Gross National Product (GNP) and Net National Product (NNP)
If the calculation of national product accounts for the total value of plants and equipment without considering depreciation, the national output is overestimated. Existing facilities and equipment deteriorate or depreciate during the year due to use and age.
Distinction between:
- Gross Investment: Spending on new plants and equipment plus the change in inventories.
- Net Investment: Gross investment less depreciation or amortization.
If gross investment is used, we calculate GNP. If net investment is used, we calculate NNP. NNP is the more accurate measurement because it accounts for the wear and tear of equipment during the year. However, depreciation is difficult to estimate, so GNP, which only requires the calculation of gross investment (for which reliable information is available), is often used in practice.