MACRO and GDP
SSEMA1 Illustrate the means by which economic activity is measured
Identify and describe the macroeconomic goals of steady economic growth, stable prices, and full employment.
The social economic goal of growth in most countries is measured by using changes in real gross domestic product over time. Countries want steady economic growth because it means the economy is moving in the right direction. Steady economic growth is usually associated with things like entrepreneurs starting new businesses, firms becoming more productive by adding capital or new technology, workers becoming more productive through increases in knowledge and skills, and productive resources being available in greater quantities for the economy. Standard SSEF6, element d, showed how to illustrate economic growth on a production possibilities curve indicating a growing economy.
Price stability refers to minimizing increases in the price level over time so that a country’s money will retain its purchasing power over time. Countries have many ways to measure changes in the price level in the economy, one of which is the Consumer Price Index. Countries want stable prices so individual, firms, and governments can correctly predict how much the money they have now will buy in the future. Our predictions, about changes in the purchasing power of our money over time, affects how we save, how much we save, and when we decide to spend our savings.
Full employment refers to the state of the economy when virtually all who are willing and able to work have the opportunity to do so. Countries have many ways to measure full employment. Countries want full employment because of the circular flow of the economy studied in standard SSMI1, element a. The income people receive from working affects their ability to buy products and pay taxes. If consumers become unemployed, they will have less income to spend, firms will receive less revenue, and entrepreneurs will earn less profit. Businesses may close because they cannot cover their costs, causing increased numbers of workers to become unemployed. If workers and entrepreneurs are earning lower incomes, they will pay less to the government in taxes, reducing the amount of public goods and services available. If governments cannot maintain roads or fund schools, the infrastructure needed to support economic activity will decline and the economy will contract.
Price stability refers to minimizing increases in the price level over time so that a country’s money will retain its purchasing power over time. Countries have many ways to measure changes in the price level in the economy, one of which is the Consumer Price Index. Countries want stable prices so individual, firms, and governments can correctly predict how much the money they have now will buy in the future. Our predictions, about changes in the purchasing power of our money over time, affects how we save, how much we save, and when we decide to spend our savings.
Full employment refers to the state of the economy when virtually all who are willing and able to work have the opportunity to do so. Countries have many ways to measure full employment. Countries want full employment because of the circular flow of the economy studied in standard SSMI1, element a. The income people receive from working affects their ability to buy products and pay taxes. If consumers become unemployed, they will have less income to spend, firms will receive less revenue, and entrepreneurs will earn less profit. Businesses may close because they cannot cover their costs, causing increased numbers of workers to become unemployed. If workers and entrepreneurs are earning lower incomes, they will pay less to the government in taxes, reducing the amount of public goods and services available. If governments cannot maintain roads or fund schools, the infrastructure needed to support economic activity will decline and the economy will contract.
Define Gross Domestic Product (GDP) as the sum of Consumer Spending, Investment, Government Spending, and Net Exports (output expenditure model).
Gross Domestic Product (GDP) is the sum of consumer spending, investment spending, government spending, and net exports. Consumer spending refers to the monetary value of what households spend on final goods and services in the product market in a given time period. Investment includes the monetary value of final capital goods businesses purchase in a given time period, the value of inventories produced by businesses, but not yet sold, by the end of the measurement time period, and the value of new home construction produced in the given time period. Government spending is the monetary value of any spending on final goods and services by a local, state, or national government in a given time period. Net exports refers to the monetary value of all final goods and services produced in one country but sold outside the country’s borders minus the monetary value of all final goods and services produced outside the country’s borders but sold within the country in a given time period. In other words, the value of a country’s exports minus the value of a country’s imports in a given time period. This method of calculating a country’s GDP is the Output Expenditure Model.