Economics Micro & Macro (CliffsAP)

National Income Accounting

Macroeconomics is an overall view of the economy’s performance. Areas such as unemployment, inflation, government
expenditures, and banking are all a part of macroeconomics. We measure a nation’s overall performance through national
income accounting. Individual firms have private accounting to measure their performance, revenue, and costs, whereas
the economy has national accounting to measure or assess this data. The accounting or measurement enables economists
and policymakers to:

■ Compare levels of production and efficiency at regular intervals

■ Gauge the long-run status of an economy to see if it has grown, remained stagnant or declined

■ Create policies that detour negative results and promote a positive outlook

Much like our circular flow chart we discussed in Chapter 1, the economy is divided into four sections:

■ Households—This section represents consumers who pay for goods and services in the product market and get

paid for goods or services in the factor market. The number of people in a household has no bearing on economic

data; however, households as a whole represent 67 percent of consumption in the United States.

■ Firms—This section represents the producers of goods and services in our economy. In a factor market, firms

buy any of the three factors of production from the households. In a product market, firms sell any of the three

factors of production to the households.

■ Government—This section refers to any or all of the political entities of a country. Government purchases come

in the form of defense spending, transfer payments, and subsidies that employ some of the factors of production.

■ Imports and exports—This section refers to the participation of an economy in a global market. An open econ-

omyrefers to the decision an economy makes to include trading imports and exports with the rest of the world.

The more a country trades with the world, the more reliant that country becomes on the rest of the world’s output.

In Figure 3-1, the government finances its expenditures through its ability to collect taxes. Firms and households continue
to create factor and product markets; however, this time the government’s expenditures help the flow move more smoothly.

Figure 3-1

Monetary Flow

The Circular Flow

Monetary Flow

Goods And Services

Goods And Services

Government

Goods And Services

Households Firms

Net Taxes

Net Taxes

Goods And Services