Measuring Economic Activity

Macroeconomics studies the economy as a whole, and to do that we first need reliable ways to measure how much a nation produces. The central measure is Gross Domestic Product (GDP): the total market value of all final goods and services produced within a country's borders over a given period, usually a year.

The circular flow of income

The economy can be pictured as a circular flow in which households supply factors of production (land, labor, capital, enterprise) to firms and receive rewards (rent, wages, interest, profit). Firms use those factors to produce output, which households buy with their income. In this closed model with no government or trade, three things are always equal: national income, national output, and national expenditure. This identity is why GDP can be measured thre