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GDP: The total market value of all goods and services produced within the political boundaries of an economy during a given period of time, usually one year. This is the government's official measure of how much output our economy produces. It's tabulated and reported by the National Income and Product Accounts maintained by the Bureau of Economic Analysis, which is part of the U. S. Department of Commerce. Gross domestic product is one of several measures reported regularly (every three months) by the pointy-headed folks at the Bureau of Economic Analysis.

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Lesson 9: Macro Basics | Unit 1: The Macroeconomy Page: 1 of 16

Topic: An Economy <=PAGE BACK | PAGE NEXT=>

Let's start with a definition:

An economy is an interactive system of production, distribution, and consumption of resources, goods, and services that addresses the basic economic problem of scarcity.

  • Economic functions are divided into four basic macroeconomic sectors:
  1. Household: the consumers.
  2. Business: the producers.
  3. Government: the regulators and taxers.
  4. Foreign: the others.
The household sector of the macroeconomy is everyone in an economy who consumes goods and services.
  • Consumption is the use of natural resources, goods, or services to satisfy wants and needs.
  • In a complex economy, consumption is expenditures by the household sector for the purchase of final goods and services.
  • Household sector is a term that indicates the consuming, wants-and-needs-satisfying population. Everyone in society is included in the household sector.
The household sector is responsible for consumption.

The business sector of the macroeconomy produces the goods and services that are consumed by the household sector.

  • The business sector is responsible for production by combining the four basic resources: labor, capital, land, and entrepreneurship.
  • A business is a method of combining resources for production.
  • While the business sector buys raw materials, intermediate goods, and other things. The most important purchase of the business sector is capital goods, or investment in capital.
The business sector is responsible for capital investment.

The government sector affects resource allocation and production by imposing laws and regulations that force decisions not otherwise made.

  • Three levels of government: Federal, State and Local.
  • The government sector collects taxes and buys a share of the economy's production, termed government purchases. These are goods such as national defense, highway and street construction, education, and police protection.
  • Government purchases do not include transfer payments (Social Security benefits, welfare or unemployment compensation).
The government sector is responsible for government purchases.

Economic activity is divided into domestic, everything within the political boundaries of a nation, and foreign, everything outside the boundaries.

  • Any citizen of the U.S., any firm owned by a U.S. citizen, and the government of any U.S. city are part of the domestic economy.
  • Any resident, business or government of another country is part of the foreign sector.
  • Exports are goods purchased by the foreign sector that are produced by the domestic economy.
  • Imports are goods purchased by the domestic economy that are produced by the foreign sector.
  • Net exports are the difference between exports and imports, or exports minus imports.
The foreign sector is responsible for net exports.

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NET INTEREST

The official item in the National Income and Product Accounts maintained by the Bureau of Economics Analysis measuring interest earned by the household sector for supplying capital services. This is one of five official factor payments making up national income. The other four are compensation of employees, rental income of persons, corporate profits, and proprietors' income. Net interest is usually less than 10 percent of national income, typically in the 6 to 8 percent range.

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