Key Macroeconomic Aggregates

Macro Economics works with a handful of economy-wide totals, called aggregates, that together describe the overall state of an economy. These are introduced here only at a conceptual level — the precise definitions and measurement of national income and output are dealt with in detail in the National Income chapter — so that the meaning of each aggregate is clear before it is used in later analysis.

1. Aggregate Output (National Product). This is the total value of all final goods and services produced within an economy over a period (usually a year). Gross Domestic Product (GDP) is the most widely used measure — the money value of all final goods and services produced within a country's borders in a year. Aggregate output is the single most important indicator of the SIZE of an economy, and its growth rate is the standard measure of economic performance. It is a FLOW variable (produced per year).

2. Aggregate Income (National Income). This is the total of all factor incomes — rent, wages, interest and profit — earned by the residents of a country over a period. Because one person's spending becomes another's income (the circular-flow insight of Section 4), aggregate income is, in principle, equal to aggregate output. National income per head (per capita income) is a common rough indicator of the average standard of living. It too is a FLOW.

3. Employment and Unemployment. The total number of people employed, and the proportion of the willing labour force that cannot find work (the unemployment rate), together describe how fully an economy is using its most important resource — its people. A central concern of Macro Economics, following Keynes, is why an economy can settle at a level of output where many workers who WANT to work at the going wage cannot find jobs (involuntary unemployment), and what can be done about it.

4. The General Price Level. This is the average level of prices of all goods and services in an economy, usually tracked through a price index. Its RATE of change matters most: a sustained rise in the general price level is called inflation, and a sustained fall is called deflation. A stable general price level protects the value of money and the incomes of ordinary people, which is why price stability is a major goal of macroeconomic policy.

5. Money Supply. This is the total stock of money available in the economy at a point in time — currency held by the public plus deposits in banks. The money supply strongly influences the general price level, interest rates, and the overall level of spending; managing it is the job of the country's central bank through monetary policy. Note that money supply is a STOCK variable (measured at a point in time), unlike output and income, which are flows.