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Measuring the Economy 1

Introduction and Summary

Table of Contents

Terms and Formulas

Macroeconomists use a variety of different observational means in their effort to study and explain how the economy as a whole functions and changes over time. One such method relies on personal experience. It is relatively simple to notice that your company is producing more than it has in the past or that a paycheck does not go as far as it used to. Yet while personal observations do provide information about the economy, that information can often be localized rather than universal, and may not accurately reflect the state of the economy as a whole.

In order to move beyond the limitations inherent in personal experiences, macroeconomists begin by systematically measuring the basic elements of the economy in order to derive standard and comprehensive statistics. This data provides information about the entire economy rather than simply about a single household or firm. Two of the most fundamental elements macroeconomists study are the total output of an economy (GDP) and the cost of living within an economy (CPI). Gross domestic product, or GDP, is an indicator of economic performance that measures the market value of goods and services produced within a country. This measurement is of great importance to consumers since it also equals the total income within an economy. The consumer price index, or CPI, is a cost of living indicator; it measures the total cost of goods and services purchased by a typical consumer within a country. This index allows economists and consumers to see just how much purchasing power a dollar yields, and to compare that power between different years and eras. Together, GDP and CPI show how much income exists within an economy and how much this income can purchase.

The concepts of GDP and CPI open the door to a scientific understanding of the functioning of the economy on a large, or macro, level. These are the most basic tools of measurement used by macroeconomists, policy makers, and consumers to understand and describe the economy. In fact, GDP and CPI are published and discussed regularly in the media. Through understanding the concepts of GDP and CPI, the world of macroeconomics begins to unfold.

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