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

Part II


Measuring the Things that Matter


© John Wiley & Sons

The Solow model of economic growth is a benchmark model of macroeconomics taught throughout the world. Check out the free article about its lessons at www.dummies.com/extras/macroeconomicsuk.

In this part …


Get a firm grip on Gross Domestic Product (GDP) and everything that goes into calculating it.


Discover why so many people worry about inflation and understand why a little bit of inflation may be a good thing.

See how unemployment affects an economy, understand how it’s measured and find out what causes unemployment levels to change.

Chapter 4


Totting up a Country’s Economic Activity: Gross Domestic Product


In This Chapter


Understanding the importance of GDP Seeing what determines wages in an economy Discovering how to calculate GDP Using GDP to measure living standards

Macroeconomists love talking about Gross Domestic Product (GDP for short)

– as much as sci-fi fans love discussing Star Trek, TV chefs the benefits of organic turnips and MPs how few expenses they can claim now and why it’s soooo unfair! When economists examine a country’s economy, GDP is probably the first thing they look at – and for good reason.

Gross Domestic Product provides a convenient snapshot of the total amount of economic activity taking place in a country. More precisely, it reveals the value of everything an economy produces in one year.

Here’s a simple way to view GDP. Imagine that every year in the UK Mary Berry bakes a massive Victoria sponge, dripping with strawberry jam (no drooling!). It’s delicious, of course, and everyone wants a piece. Now think of the entire cake as the UK’s GDP and each person’s slice as their personal income that year. Economists dream about two objectives for the cake, er, for GDP:

Efficiency: They want the economy to be as big and tasty as possible.


Equity: They’d like everyone to get a similarly sized slice.

In this chapter we look at GDP in some detail, why it’s important, show how economists calculate it and how equally it’s shared, and describe the light it can shed on people’s living standards.