ABSTRACT

This chapter introduces the portion of the book on macroeconomics, building on the ideas of the previous four chapters to provide an overview of aggregate economic activity. It begins by sketching a basic circular flow model of the economy and defining key terms, beginning with a closed economy without a public sector, then adding government, and, finally, modelling an open economy. Important identities relating to savings, investment, public spending, taxation, and trade are discussed to show how economies adjust to new conditions in these areas. Then, the chapter shows three examples of economic goals that can be pursued: growth of production, price stability, and full employment, developing the key measures of GDP, inflation, and unemployment rates needed to measure progress towards each of the goals. Next, the three goals are presented in the framework of the business cycle as a unifying framework. Finally, the chapter argues that other things, such as time use, are worth measuring to provide important insights into where value is being created and who is creating it, especially seeking to incorporate unpaid economic activity in households into a broader discussion of economic progress.