Whilst microeconomics studies the behaviour of firms and individuals, macroeconomics studies the behaviour and performance of an economy as a whole. When we say "economy", we refer to gross domestic product or GDP, as it is commonly abbreviated. It is the total value of all goods and services produced in a country or any other selected region (say, Europe or the whole world). When we talk about economic growth or economic decline, we imply changes in the GDP.
GDP is measured as the sum of consumption, investment, government spending and net exports:
GDP = Consumption + Investment + Government Spending + Exports - Imports
"Wait a minute! What about savings and tax? How do they fit into the GDP?"
"An excellent question, my imaginary reader!"
Another way of looking at the economy's income is to split it into three baskets: consumption, saving and taxation:
GDP = Consumption + Saving + Taxation
(Investment - Savings) + (Exports - Imports) + (Government Spending - Taxation) = 0
It is important to point out that GDP is a flow value as opposed to a stock value. It measures national output over a period of time not at a point of time, like an annual income vs. funds on a bank account on a certain date. As such, budget or government deficit (often expressed as a percentage of GDP) should not be mixed up with national debt or government borrowing - watch out for confusing newspaper headlines!
Comparing GDPs of different economies, we need to take into account a few other factors, most notably, population. Real GDP (which means it has been adjusted for inflation) of China may very well catch up with the US by 2016, but looking at GDP per capita (GDP divided by population) suggests that the US population
GDP is how we measure economic well-being and of course it is not perfect. British economists Mell and Walker point out that "most economists feel about GDP the same way Winston Churchill felt about democracy when he quipped that: "Democracy is the worst form of government ... apart from all the others that have been tried from time to time."
The most eloquent criticism of the GDP was delivered by Bobby Kennedy in 1968. He said:
"Our gross national product ... if we should judge America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who breaks them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armoured cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.
Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile."
That was a lesson in macroeconomics with a bonus section on inspired speech-making.