What is the Economy?

(AND SHOULD YOU CARE ABOUT IT?)

If you ever watch, read, or listen to something called “the news” you will likely hear people talking about “the economy.” People on the news might say that the economy is getting bigger or smaller, weaker or stronger. They might compare one economy to another, in rather the same way they compare the polling results of presidential candidates. Listening to all of this, one begins to see the economy as an almost living thing. Nor is it a particularly sensible one. It has spells where it gets all sluggish and depressed or irrationally exuberant. The whole thing can seem both random and distant, and you reasonably might wonder if you should care.

WHAT IS THE ECONOMY?

Usually when people talk about the economy they do so in terms of one of a few numbers. The most common one is Gross Domestic Product (GDP). GDP measures all of value of the final output produced in a place in a period of time.  If you add up all the goods and services produced in the United States and subtract the goods and services spent in their production, you get a number, in 2015 this number was just shy of 18 trillion dollars.

Fortunately, this is not a post about the GDP, so we don’t need to worry about how exactly this number is calculated, or how it could be calculated better, or what other numbers one might use instead. The important thing is what is attempting to be measured-the value of everything produced in a country. If you read most definitions of “economy” you will usually read something like this. The economy is the value of everything produced in a society, or the ability of a society to produce valuable things, or something like that.

While GDP and the economy are often talked about as being synonymous the GDP is only one measure of the economy.  A change in the methodology of calculating the GDP will change the GDP numbers, but does not change the real situation. Hopefully any methodological changes to GDP would bring it more in line with the real thing it is trying to measure.

THE ECONOMY IS NOT A THING

 

We tend to talk about the economy as a singular thing. It isn’t.  It is better thought of as a summation and aggregation of many things. When you hear “the economy grew by .4% in the fourth quarter” you should not think about one vague thing changing, but many concrete things changing. There might have been more cars produced, less tax accounting done, and about the same amount of pies and cookies baked.  Since we can measure each of these things in terms of their dollar value, we can add them all up and come up with a sort of aggregate that we call ‘the economy’.

TheEconomy

The Economy

SHOULD YOU CARE ABOUT THE ECONOMY?

No one, with the possible exception of some economists, should care about the economy in and of itself. That said, the economy does have an influence over things that most people do care about. The first is the wealth and livelihood of yourself and your friends and family. For this, nationally reported measures such as GDP growth or unemployment rates are likely to be mediocre indicators.  You should probably pay them some mind, but in the context of your own situation.  You likely already know what your own economy looks like. You know if it looks weak or strong, if your wealth is likely to increase or decrease. Depending on who you are, your own economy might follow the larger economy closely or not at all.

This is fine as far as you are concerned, but what about everybody else. What if you care about how everyone else in your society is doing?

If you care about the well-being of your fellow members of society, you will likely want to pay at least some attention to their economic and financial situations.  The aggregate of everyone’s individual economic situations is not vaguely correlated to the economy, it is the economy.

A desire to see how everyone is doing is why we started measuring the economy in the first place.  During The Great Depression, there was a sense that things weren’t working very well, but there was no way to really capture the whole of what was going on, to see if things were getting better or worse. In response to this the government started measuring National Income, which would later be replaced by Gross Domestic Product.

At a fundamental level, economic well-being tends to gives people choices, and a lack of wealth takes away choices. You should care about how the economy is doing, not because we like bigger numbers on our GDPs, but because we like more people to have more and better choices about how they live their lives.

 

 

 

 

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