Understanding Macroeconomics: Key Concepts and Variables
Macroeconomics
Macroeconomics focuses on the study of the national and international economic situation. This branch of the economy is not interested in individual consumer behavior, but in changes in the consumption of the whole population. Economists use a number of variables to understand the situation of an economy and make comparisons with other countries. These variables, related to all economic activities, are often called macroeconomic variables and deal with the production and income of the national economy. In Spain, the measurement of the value of these magnitudes is performed by the National Institute of Statistics, which is the body that prepares the national accounts.
The Circular Flow of Income
Between families and businesses, a constant exchange of goods and services is generated along with their corresponding payments, which is known as the circular flow of income. A real flow occurs when families provide businesses with factors of production, especially labor, and companies produce goods and services sold to families. A monetary flow occurs when companies offer payments to families for the factors of production used, and families make payments for goods and services provided.
We can appreciate the money flows through the circuit in a second direction: from companies to families and from families back to companies. Money leaves the circuit through savings by families, taxes paid by families and businesses, and sales or purchases made outside the country.
The National Product
All such property and business-generated services in a country are known as the national product. The Gross National Product (GNP) is the value of all final goods and services obtained by firms in a country during a specified time, generally a year.
Economic Equilibrium
Equilibrium leads to a situation of harmony in a country’s economy when production is sufficient to absorb the planned consumption by households and the investment spending desired by businesses.
Nominal and Real Magnitudes
When you get the value of macroeconomic magnitudes, it is necessary to know if it is given in nominal terms or in real terms. If only calculated in nominal terms, the manufacturing information would be distorted. One might believe there has been a great increase in production in the last year, when the increase in value may be due to the rise in the price of goods produced, not the increase in units manufactured.
Main Macroeconomic Magnitudes
- National Product: Considers the production of goods and services obtained by companies in a country, both inside and outside it.
- Gross Domestic Product (GDP): Includes items manufactured within a nation, both by the companies of the country itself and by foreign businesses.
- National Income: Analyzes all income received by national production factors.
- Disposable Income: Indicates the share of national income available to citizens after paying taxes and social security contributions.
- Per Capita Income: Indicates the income that corresponds to each person on average.
Disposable Personal Income
Disposable personal income indicates the part of the national income that individuals can use for consumption and savings.
Per Capita Income
Per capita income shows the share of national income that corresponds to each inhabitant of a country on average.
Distribution of Income
The distribution of income indicates how income or national production is distributed among the population of a country.