• Just as there are basic economic principles which apply in particular markets.

• If prices and wage rates had also declined immediately by one-third, then of course the reduced money supply could still have bought as much as before, and the same real output and employment could have continued.

• In reality, however, a complex national economy can never adjust that fast or that perfectly, so there was a massive decline in total sales, with corresponding declines in production and employment.

Fallacy of Composition

• When thinking about the national economy, a special challenge will be to avoid what philosophers call “the fallacy of composition”—the mistaken assumption that what applies to a part applies automatically to the whole.

• The flawed assumption that what applies to a part of the economy applies to the whole, which ignores the interactions between actors.

• The fallacy of composition is not peculiar to economics.

• What is at the heart of the fallacy of composition is that it ignores interactions among individuals, which can prevent what is true for one of them from being true for them all.

• The fallacy is not in believing that jobs can be saved in given industries or given sectors of the economy, but that these are net savings of jobs for the economy as a whole.

Output and Demand:

• The demand for goods and services, indicated by consumer spending, drives the total level of output in the economy.

• One of the most basic things to understand about the national economy is how much its total output adds up to.

• The government is almost always another major factor in the national economy, even though it may or may not be in particular industries.

• One of the oldest confusions about national economies is reflected in fears that the growing abundance of output threatens to reach the point where it exceeds what the economy is capable of absorbing.

• The total real income of everyone in the national economy and the total national output are one and the same thing.

• The fear of a permanent barrier to economic growth, based on output exceeding real income, is as inherently groundless today as it was in past centuries when output was a small fraction of what it is today.

• When various government policies generate uncertainty and apprehensions, this can lead individuals and businesses to want to hold on to their money until they see how things are going to turn out.

• An economy cannot continue producing at full capacity if people are no longer spending and investing at full capacity, so cutbacks in production and employment may follow until things sort themselves out.

• What economists in general agree on is that this situation is very different from the situation feared by those who foresaw a national economy simply glutted by its own growing abundance because people lack the income to buy it all.

Measuring National Output

• A country’s total wealth includes everything it has accumulated from the past.

• Its income or national output, however, is what is produced during the current year.

• Accumulated wealth and current output are both important, in different ways, for indicating how much is available for different purposes, such as maintaining or improving the people’s standard of living or for carrying out the functions of government, business, or other institutions.

• National output during a year can be measured in a number of ways, such as GDP and GNP.

• Gross Domestic Product (GDP): Measures national output by summing all goods and services produced within a nation’s borders.

• Gross National Product (GNP): the sum total of all the goods and services produced by the country’s people, wherever they or their resources may be located.

• The real distinction that must be made is between both these measures of national output during a given year—a flow of real income—versus the accumulated stock of wealth as of a given time.

• Just as national income does not refer to money or other paper assets, so national wealth does not consist of these pieces of paper either, but of the real goods and services that money can buy.

• Sometimes national output or national wealth is added up by using the money prices of the moment, but most serious long-run studies measure output and wealth in real terms, taking into account price changes over time. terms, taking into account price changes over time.

• Over a period of generations, the goods and services which constitute national output change so much that statistical comparisons can become practically meaningless, because they are comparing apples and oranges.

• A further complication in comparisons over time is that attempts to measure real income depend on statistical adjustments which have a built-in inflationary bias.

• Real wages are simply money wages adjusted for the cost of living, as measured by the consumer price index, but if that index is biased upward, then that means that real wage statistics are biased downward.

• The same problems which apply when comparing a given country’s output over time can also apply when comparing the output of two very different countries at the same time.

• One of the usual ways of making international comparisons is to compare the total money value of outputs in one country versus another, however, this gets us into other complications created by official exchange rates between their respective currencies, which may or may not reflect the actual purchasing power of those currencies.

• Consumer Price Index (CPI): Measures inflation from the average change in prices over time that consumers pay for a grouping of goods and services

• GDP per Capita: Measure indicating national prosperity based on economic growth