• Explain how gross domestic product (GDP) is used to evaluate the health of an economy
• Distinguish between monetary and fiscal policy

Macroeconomics

While microeconomics covers topics related to the actions of individual people or businesses within the economy, macroeconomics examines the larger economy. The United States and most other countries have three main macroeconomic goals: economic growth, full employment, and price stability. A nation’s economic well-being depends on carefully defining these goals and choosing the best economic policies for achieving them.

Economic Growth

gross domestic product (GDP)

The most basic measure of economic growth is the gross domestic product (GDP). GDP is the total market value of all final goods and services produced within a nation’s borders each year. When GDP rises, the economy is growing. GDP is among the most important ways to evaluate a nation’s economic health.

Prior to the disruptions of the COVID-19 pandemic, the U.S. economy had been growing at a slow but steady rate of between 2 and 3 percent annually. This growth rate reflects a steady increase in the output of goods and services and relatively low unemployment. When the growth rate slides toward zero, the economy begins to stagnate and decline. The negative GDP growth rate in 2020 was a result of the disruptions felt during the pandemic. Not only did many experience unemployment but disruptions to supply chains slowed the production of goods.^[1]

One country that continues to grow more rapidly than most is China, whose GDP had been growing at 6 to 7 percent per year prior to the pandemic. Few things in the global marketplace are not or cannot be made in China. The primary contributor to China’s rapid growth has been technology.

Business Cycles

The level of economic activity is constantly changing. These upward and downward changes are called business cycles. Business cycles vary in length, in how high or low the economy moves, and in how much the economy is affected. Changes in GDP trace the patterns as economic activity expands and contracts. An increase in business activity results in rising output, income, employment, and prices. Eventually, these all peak, and output, income, and employment decline. A decline in GDP that lasts for two consecutive quarters (each a three-month period) is called a recession. It is followed by a recovery period when economic activity once again increases. The most recent recession began in December 2007 and ended in June 2009. If a recession lasts a long time and the slowing of economic activity is very severe, then it can turn into a depression.

Businesses must monitor and react to the changing phases of business cycles. When the economy is growing, companies often have a difficult time hiring good employees and finding scarce supplies and raw materials. When a recession hits, many firms find they have more capacity than the demand for their goods and services requires. During the most recent recession, many businesses operated at substantially lower than capacity. When plants use only part of their capacity, they operate inefficiently and have higher costs per unit produced. Let’s say that Mars Corp. has a huge plant that can produce one million Milky Way candy bars a day, but because of a recession, Mars can sell only half a million candy bars a day. The plant uses large, expensive machines. Producing Milky Ways at 50 percent capacity does not efficiently utilize Mars’s investment in its plant and equipment.

 

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