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

Discovering five important terms (though knowing one is enough)

Like all practices, economics has its own terminology. We aim to keep the jargon in this book to an absolute minimum, but here are five essential terms that you hear economists using.

When calculated for the economy as a whole, all these measures are equal!


Gross Domestic Product (GDP): Value of final goods and services an economy produces in one year (a final good or service is one directly provided to the end user). Specifying that it’s only the value of final goods and services is important to avoid double counting. So if you own a coffee shop, every time you sell a coffee for £3 that adds exactly £3 to GDP. The cost of coffee beans and milk and so on is already included in that £3, so it can’t be added again to GDP.


Output: Aggregate output of an economy is also a measure of the value of the goods and services produced by an economy in a year. So output is really just GDP by another name!


Production: The aggregate production of an economy is just the total value of everything produced by firms in one year. Of course, firms produce the goods and services in the economy, so production is really just GDP or output by another name! (Perhaps you’re wondering whether it really is just firms that produce goods and services. What about if you set up a market stall selling handbags or even do some babysitting for a neighbour? Economists bypass these questions by just calling anyone or anything that provides a good or a service a ‘firm’.)


Income: Aggregate income is the sum of everyone’s income in an economy. And where does income come from? Well, it comes from selling the output/production/GDP of the economy. No surprise, then, that income must also be equal to the others.


Expenditure: Aggregate expenditure is just the sum of everyone’s expenditure, that is, their spending on goods and services. Because every £1 of income must have been spent by somebody, aggregate expenditure must also be equal to aggregate income.

So now you know: next time some smart-alec economist or politician tries to bamboozle you with any of these terms, they’re all equivalent!

Chapter 3