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What Are the Basics of Macroeconomics?

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  • Written By: Benjamin Arie
  • Edited By: Shereen Skola
  • Last Modified Date: 27 August 2016
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Macroeconomics is an area of economics dealing with the broad components of a country's economy. While the basics of macroeconomics focuses somewhat on the behavior of individuals, there are major factors that are found at the national level. The most important basics of macroeconomics include inflation, gross domestic product, and unemployment.

Gross domestic product (GDP) is generally defined as the sum of all goods and services that are created by one country annually. Gross national product (GNP) is a similar measurement, but this takes into account national interests that are not necessarily produced within a country's physical borders. Cars built in a Mexican factory but owned by a U.S. corporation are an example of a GNP value that does not technically count as GDP. Either measurement can be used to estimate a country's productivity on a macroeconomic level.

Unemployment is a rate that indicates how many people in a country cannot find work. This is a key indicator in studying the basics of macroeconomics. The unemployment rate is usually expressed as a percentage of working-age adults. A rate of ten percent, for example, means that one in ten workers are not actively employed in jobs. This figure ignores people who traditionally are not part of the labor force, such as children and the elderly.

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Inflation is the rate at which prices within a country are increasing. Economists usually determine inflation by gauging the prices of several key goods and services. Inflation does not mean that an item has actually become more valuable, but rather that the monetary price has gone up. A bottle of a typical soft drink in the 1940s, for example, cost around five U.S. cents. This product has remained mostly the same, yet costs much more today due to inflation.

The basics of macroeconomics are not isolated principles, but are closely linked. Changes in one macroeconomic factor can cause another indicator to rise or fall. When the GDP of a country is growing, unemployment is usually low. This is because jobs and labor are necessary to build new products and offer services. Similarly, periods of high unemployment often occur when a nation's gross domestic product decreases.

Levels of inflation are also linked to changes in GDP and unemployment. When GDP begins to decline, governments sometimes decide to stimulate the economy by issuing extra money. These stimulus funds can be used to buy goods and hire workers. The injection of additional currency, however, often means that each paper bill is worth less, and inflation occurs.

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