Here are the basics of understanding macroeconomics, which is the study of the “the economy.”
The economy is the collection of all buying and selling of goods and services. Every time you buy food or watch a movie, you are participating in the economy.
Macroeconomics is the big picture of how economic systems change over time. Long-term macroeconomics compares the historical development of economies over decades. It is fascinating to think about where we’ve come from and where we’re headed, but these types of questions are sometimes considered too academic.
Most business focuses on short-term macroeconomics over months, quarters, or upcoming years. The business cycle is the expansion and contraction of the economy. Economic contractions are also known as recessions. In the U.S., most people use the National Bureau of Economic Research (NBER) business cycle dating, which designates recessions.
The unemployment rate is a good measure of the business cycle, because it falls in expansions and rises in contractions. In the U.S., the national unemployment rate is reported as part of the monthly “jobs report” released by the Bureau of Labor Statistics.
Gross domestic product (GDP) is the most comprehensive measure of an economy. It is typically used to measure the size of a national economy, like the United States. GDP for the U.S. is the value of the goods and services produced by labor and property located in the United States. U.S. GDP is reported quarterly by the Bureau of Economic Analysis.
Nominal GDP is GDP that includes inflation. Real GDP is GDP net of inflation. In other words, real GDP adjusts for inflation in the following way:
Real GDP = Nominal GDP – Inflation
Most financial news reports real GDP growth. Real GDP growth in the U.S. since WWII has been about 3%.
The components of GDP are the following:
GDP = C + I + G + (X – M)
where C is consumption, I is business investment, G is government spending, and X-M is exports minus imports (net exports). Consumer spending contributes about 70% to U.S. GDP.
An economic calendar provides a list of the scheduled economic data releases and the median economic forecast for the data. An example is the MarketWatch economic calendar.
The Federal Reserve Bank of St. Louis hosts the Federal Reserve Economic Data (FRED) website, which is a portal for macroeconomic data. FRED contains data on many important economic indicators for the business cycle.
During crises, some sectors and some households suffer worse than others. This can increase economic inequality.
The government response to an economic crisis is an important aspect of understanding the severity of a crisis and the subsequent recovery.