Eco372 - Fundamentals in Macroeconomics

ECO372 - Fundamentals in Macroeconomics

Fundamentals in Macroeconomics

ECO/372

November 20, 2012

Fundamentals in Macroeconomics

Determining economic health using macroeconomics involves the consideration of many factors that affect an economy as a whole. Factors such as Gross Domestic Product, unemployment, inflation, and interest provide indications of the health of an economy (2010). In a healthy economy, consumer spending is higher, and unemployment, inflation and interest rates are at a stable acceptable level. Situations such as mass layoffs can have a devastating effect on an economy and can lead to recession however in contrast, a decrease in taxes may stimulate the economy to recovery.

Prior to the mid-thirties, economists did not study the aggregate economy, but preferred studying microeconomics. In the mid-thirties, Keynesian economists created terminology and means to measure concepts in macroeconomics to provide concrete terms for macroeconomic problems. Simon Kuznets and Richard Stone, Keynesian economists, created an aggregate accounting system including rules and definitions for measuring economic activity in an economy as a whole (2010). Aggregate accounting provided a way to measure aggregate production and aggregate income.

The gross domestic product (GDP) is the most frequently used measure of domestic output. The GDP is the total market value of all goods and services purchased in a country during a year for final use. GDP does not include products or services used to produce those final products. The GDP has four expenditure categories consumption, investment, government spending, and net exports. Consumption is household spending on goods and services, the products and services consumers purchase and use. Investment spending is for the intention of additional production or for future production of goods and services. It includes business expenditures on factories...