Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Clarifying Important Macroeconomic Concepts

Switch on the news or read a newspaper and inevitably you’re confronted with a number of stories about the economy: perhaps the latest interest rate move by the Bank of England, the most recent GDP figures or what’s happened to the budget deficit.

In this section we present some of the central concepts and terms of

macroeconomics.

Many of the terms used by economists can be confusing to non-economists, partly because, like all disciplines, economics has developed its own jargon for describing different things. Plus, some common words take on a different meaning when economists use them! We make every effort to cut through the jargon of macroeconomics.

Knowing that what’s real counts


Economists make a crucial distinction between real variables and nominal variables:


Nominal: Variables quoted in terms of money. For example, the price of something or your hourly wage in pounds.


Real: Variables that are quoted in terms of quantities. For example, the number of people unemployed or how much you are paid in terms of goods.

Imagine you’re offered a job in the exotic location of Econland. Before deciding whether to accept, you want to ask some questions. One is, ‘What’s the salary?’. The firm tells you that the salary is 1 million ecos (the currency of Econland). You get very excited and picture buying a yacht. But wait a minute – before you accept and go on a spending spree, one important piece of information is missing. How much do things cost in Econland? Or equivalently, how much can you actually buy with 1 million Ecos?

Economists call the answer to the first question the nominal wage: it tells you how much you’re going to be paid in terms of money. The answer to the second question is the real wage: it tells you how much you’re paid in terms of goods. Economists think that the real wage is what matters. After all, it determines your standard of living. The nominal wage is just a name, and economists think that the names of things shouldn’t really matter.

You encounter this distinction between real variables and nominal variables

throughout the book. In almost every case, economists think that the real variable is what really counts.