In previous Fridays Academy postings we have already seen how the measurement of poverty itself is the first step towards understanding the economic policies needed to reduce the number of poor. The second step is to understand the basic components of how an economy works. This in turn requires some knowledge of macroeconomics, the branch of economics that studies the aggregate economy by focusing on the analysis of key macroeconomic variables, including the economy’s total output, inflation, unemployment, the balance of payments, and the exchange rate.
This chapter examines how economic growth is measured (through the concept of GDP) by identifying the underlying components and examining their interrelationships within the national accounts framework. It also introduces briefly the external sector in order to focus on key relationships between a country’s national accounts and its balance of payments.
In studying the aggregate economy, five key economic sectors are identified – households, enterprises, financial sector, government and the rest of the world. The circular flow of income, expenditure and financing captures the important relationships between the five key economic sectors and the markets.
Read the whole note.
Next Friday: Macroeconomic concepts
- Macroeconomic Management