5 Important Macroeconomics Terms
Like all practices, economics has its own terminology. Following are explanations of five essential terms that economists use all the time. When calculated for the economy as a whole, all these measures are equal:
- Gross Domestic Product (GDP): Value of final goods and services an economy produces in one year (a final good or service is one directly provided to the end user). Specifying that it’s only the value of final goods and services is important to avoid double counting. So, if you own a coffee shop, every time you sell a coffee for $3, that adds exactly $3 to GDP. The cost of coffee beans and milk and so on is already included in that $3, so it can’t be added again to GDP.
- Output: Aggregate output of an economy is also a measure of the value of the goods and services produced by an economy in a year. So, output is really just GDP by another name.
- Production: The aggregate production of an economy is just the total value of everything produced by firms and the government in one year. Pretty clearly, this means that production is really just GDP or output by another name. Perhaps you’re wondering why we say it’s the production by firms that yields private goods and services. What if you set up a market stall and sell handbags or do some babysitting for a neighbor? Economists bypass these questions by just calling anyone or anything that provides a good or a service traded in the market place a firm. Goods produced at home, such as meals and laundry, or produced for the underground economy, are not part of GDP.
- Income: Aggregate income is the sum of everyone’s income in an economy. And where does income come from? Well, it comes from selling the output/production/GDP of the economy. No surprise, then, that income must also be equal to those things; equal to production.
- Expenditure: Aggregate expenditure is just the sum of everyone’s expenditure, that is, their spending on goods and services. This can be different from aggregate income, and the difference is the trade balance. If aggregate income exceeds aggregate expenditure, the economy is running a surplus in its international accounts. If expenditure exceeds income, it’s running a deficit.