GED Social Studies Test: Macroeconomics Fundamentals

By Achim K. Krull, Murray Shukyn

You will need to know some macroeconomics fundamentals for the GED Social Studies test. Macroeconomics looks at the factors that affect the economy on a national and international level. It tries to explain the effect of government policies on the entire economy and what influences prices overall.

Countries measure their economies by gross domestic product (GDP), and overall productivity by GDP per person. GDP represents the monetary value of all goods produced in a country over a given time, usually annually. The GDP per person divides that amount by the population of the country. It allows comparisons of year-to-year changes in one economy as well as comparisons of the economies worldwide.

Two measures of how well the economy is doing are economic growth and inflation/deflation. Growth is monitored in terms of the annual increase or decrease in GDP, while inflation measures the rate at which prices are rising (or dropping, in the case of deflation).

Governments can influence macroeconomics in various ways, including the following:

  • Setting or removing tariffs: They can charge fees on products coming into the country from foreign markets to prevent competition and lower prices that negatively affect domestic producers. Or they can remove tariffs to encourage the importation of goods, often resulting in lower prices for consumers. Tariffs tend to discourage trade for obvious reasons.

  • Increasing or decreasing government spending: To create jobs and stimulate the economy, a government may increase spending. Of course, when the government has insufficient funds to cover its increased spending, they must resort to deficit spending, borrowing to spend, which increases the national debt and could result in problems down the road.

    National debt is the total amount the federal government owes. When you hear politicians discuss the budget deficit, they’re talking about the annual shortfall, the difference between how much the government collects in revenue (mostly from taxes) and the amount it spends in any given year. With a deficit reduction, the national debt continues to grow. The government would need to have a budget surplus rather than a deficit for it to lower the national debt.

  • Increasing or decreasing interest rates: In the United States, the Federal Reserve monitors economic conditions and either lowers or raises the interest rate on the money it lends to banks. The Federal Reserve attempts to maintain GDP growth at a rate of 2 to 3 percent annually. If the GDP grows slower than that, the Federal Reserve tends to lower interest rates to encourage consumer and business spending to stimulate the economy. When the GDP grows faster than that, the Federal Reserve tends to raise interest rates to keep inflation in check.

Why is GDP per person a more accurate measure of an economy than just the GDP?

  • (A) It shows individual incomes.

  • (B) It takes total population into account.

  • (C) It shows economies of small countries more accurately.

  • (D) all of the above.

GDP per person puts international comparisons on an equal footing. Economies like China may be producing far more than the economy of Great Britain or France, but taking China’s huge population into account shows economic production more accurately. Your best option is Choice (B). Although Choices (A) and (C) are partially true, they’re not the best choices.