Students must understand the importance of measuring aggregate economic activity. Macroeconomics
hopes to produce theories that provide useful insights and policy conclusions. To be credible, such theories
must produce hypotheses that evidence could possibly refute. Macroeconomic measurement provides such
evidence. Without macroeconomic measurements, macroeconomics could not be a social
would rather consist of philosophizing and pontificating. Market transactions provide the most simple and
direct measurements. Macroeconomists’ most basic measurement is Gross Domestic Product (GDP), the
value of final, domestically market output produced during a given period of time.
In the United States, the Commerce Department’s National Income and Product Accounts provide official
estimates of GDP. These accounts employ their own set of accounting rules to ensure internal consistency
and to provide several separate estimates of GDP. These separate estimates are provided by the product
accounts, the expenditure accounts, and the income accounts. The various accounting conventions may, at
first glance, be rather dry and complicated. However, students can only easily digest the material in later
chapters if they have a good grounding in the fundamentals.
GDP changes through time because different amounts of goods and services are produced, and such goods
and services are sold at different prices. Standards of living are determined by the amounts of goods and
services produced, not by the prices they command in the market. While GDP is relatively easy to
measure, the decomposition of changes in real GDP into quantity and price components is much more
difficult. This kind of problem is less pressing for microeconomists. It is easy to separately measure the
number of apples sold and the price of each apple. Because macroeconomics deals with aggregate output,
the differentiation of price and quantity is much less easily apparent. It is important to emphasize that
while there may be more or less reasonable approaches to this problem, there is no unambiguous best
approach. Since many important policy discussions involve debates about output and price measurements,
it is very important to understand exactly how such measurements are produced.
Classroom Discussion Topics
As the author demonstrates in presenting this chapter’s material, much of this material is best learned by
example. Rather than simply working through the examples from the text or making up your own, the
material may resonate better if the students come up with their own examples. They can start by picking a
single good, and by the choice of their numbers they provide their own implied decomposition of output
into wage and profit income. Later on, encourage them to suggest intermediate input production, inventory
adjustments, international transactions, a government sector, and so on. Such an exercise may help assure
them that the identities presented in the text are more than simply abstract constructions.