Microeconomics and Macroeconomics
Microeconomics is the study of how individual participants in the economy interact with one another. Participants include consumers, firms, workers, savers, investors, and others. These participants interact in the marketplace. Consumers, for example, seek to purchase the goods and services that they need for the lowest possible price. Firms, on the other hand, seek to produce goods and services that generate the largest possible profits. Workers offer their services to employers and hope to earn the highest possible wage. And so, it goes. Microeconomics examines these behaviors in some detail.
Macroeconomics is the study of how the overall economy functions. Major macroeconomics topics include changes in price levels in the economy, and increases or decreases in unemployment. Macroeconomics also deals with changes in aggregate supply (the total supply of goods and services produced in the economy) and aggregate demand (the total demand for goods and services). National policies to stabilize the economy and to promote economic growth are also central to the study of the macroeconomy.
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Gross Domestic Product
Region's gross domestic product, or GDP, is one of several measures of the size of its economy. The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time. Until the 1980s the term GNP or gross national product was used. The two terms GDP and GNP are almost identical. The most common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption + investment + government spending + (exports/ imports).
Gross means depreciation of capital stock included. Without depreciation, with net investment instead of gross investment, it is the Net domestic product. Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation (often called cumulative exports) then adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic production not consumed at home (the exports).
Economists (since Keynes) have preferred to split the general consumption term into two parts: private consumption and public sector (or government) spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:
Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption. If separated from endogenous private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. Therefore, GDP can be expressed as:
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GDP = private consumption + government + investment + net exports (or simply GDP = C + G + I + X—M (‘X”, ‘M’ accounts for exports and imports, respectively)).
The components of GDP
Each of the variables C, I, G, and NX
C is private consumption (or Consumer expenditures) in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on.
I is defined as business investments in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Investment in GDP is meant very specifically as non-financial product purchases. Buying financial products is classed as saving in macroeconomics, as opposed to investment (which in the GDP formula is a form of spending). The distinction is (in theory) clear: if money is converted into goods or services without a repayment liability, it is investment. For example, if you buy a bond or a share, the ownership of the money has only nominally changed hands, and this transfer payment is excluded from the GDP sum. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds and not part of the real economy or the GDP formula.
G is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. The relative size of government expenditure compared to GDP as a whole is critical in the theory of crowding out and the Keynesian cross.
NX are “net exports” in the economy (gross exports/ gross imports; also X/M). GDP captures the amount a country produces, including goods and services produced for overseas consumption, therefore exports are added. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.
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