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What economic concepts are most important for citizens? Here is our top 10 list of macroeconomic concepts.
First, gross domestic product is the monetary value of all final goods and services produced in an economy. GDP is a less-than-perfect but consistent way to measure economic growth and compare the size of countries’ economies.
Second, GDP does not include household production, such as cleaning, yard work and raising children, nor the underground economy, and has other conceptual flaws, but as noted above, it is a consistent measure.
Third, people with jobs are employed. People who don’t have jobs and are looking for work are unemployed. The sum of the two is the labor force. The unemployment rate is the number of people unemployed divided by the labor force. People who don’t have a job and are not looking for a job are not in the labor force.
Fourth, there are several measures of the money supply. M1 includes currency held by the public and the amount in their checking accounts. M2 includes M1 plus the amount of money in savings accounts and money market funds.
Fifth, inflation is the amount by which prices increase from year to year. In the long run, inflation is caused by the money supply increasing faster than the increase in the production of goods and services.
Sixth, economic growth occurs when an economy’s ability to produce more goods and services increases from one period to another. Economic growth is why extreme global poverty has dramatically decreased over the last 100 years.
Seventh, a budget deficit occurs when a government spends more than its tax revenue. The government borrows money to cover the deficits. The national debt is the accumulation of the amounts borrowed by the U.S. federal government, and in 2023, was at $33 trillion.
Eighth, in the short run, GDP and the price level are determined by aggregate demand and aggregate supply for goods and services. In the long run, GDP is determined by innovation in the economy.
Ninth, fiscal policy is governments’ spending and taxes. Fiscal policy can affect aggregate demand. More government spending and lower taxes increase aggregate demand and vice versa.
Tenth, monetary policy is the Federal Reserve’s actions that affect short-term interest rates that influence aggregate demand through borrowing costs to businesses and consumers.
As we mentioned in our top 10 microeconomics list, the scarcity created by a top 10 list leaves out many other vital concepts!•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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