Learning Objectives

2.1 Differentiate among the three approaches to national income accounting.

2.2 Explain how GDP is measured.

2.3 Discuss the measurement of aggregate saving and its relation to wealth.

2.4 Explain the calculation of real GDP, price indexes, and inflation.

2.5 Define real and nominal interest rates.

Measurement is a crucial part of scientific study. Accurate measurement is essential for making new discoveries, evaluating competing theories, and pre­dicting future events or trends. During the first half of the twentieth century, painstaking research by economists such as Nobel Prize winner Simon Kuznets (the first person to obtain comprehensive measures of national output) and the team of Arthur Burns and Wesley Mitchell (who performed detailed measure­ments of the stages of the business cycle) showed that careful economic mea­surement is not only possible but also necessary for any serious understanding of the economy. Their work, and the efforts of many other researchers, trans­formed economics from a field in which scholars relied on informal observa­tions and broad generalizations to one in which numbers and statistical analysis play an essential role.

In this chapter we present some of the conceptual and practical issues involved in measuring the macroeconomy. We focus on the national income accounts, a framework for measuring economic activity that is widely used by economic researchers and analysts. Learning about the national income accounts will familiarize you with some useful economic data. In addition, because the national income accounts are set up in a logical way that mirrors the structure of the economy, working through these accounts is an important first step toward understanding how the macroeconomy works. When you fin­ish this chapter, you will have a clearer understanding of the relationships that exist among key macroeconomic variables and among the different sectors of the economy.

2.1