This blog post examines the meaning of macroeconomics and GDP as a starting point for understanding the national economy, calmly exploring how the flow of production, income, and expenditure connects to growth and living standards.
Understanding the National Economy
This blog post explains the national economy. In other words, it focuses on what is commonly referred to as ‘macroeconomics’. Many of the stories we frequently hear in economic news are directly related to macroeconomics. Phrases like “the economy is good,” “the economy is bad,” “prices have risen,” “Exports are slumping, which is a major problem” – all these expressions fall under the category of macroeconomics.
This blog post contains only the essential core concepts you absolutely need to understand macroeconomics. The most central concept in macroeconomics is GDP. Therefore, this blog post uses GDP as its axis to explain, in turn, economic downturns and crises, fiscal policy, inflation, and exchange rates. Particularly since 2022, as inflation has intensified globally, central bank benchmark interest rate adjustments have emerged as a crucial factor for understanding macroeconomics. Consequently, this section receives relatively extensive coverage. Macroeconomics involves numerous variables intricately intertwined, making it a challenging domain to grasp intuitively. Nevertheless, I hope the content in this blog post provides at least a small clue toward understanding macroeconomics.
How can we judge a nation’s economic scale?
Macroeconomics views the economy at the national level. The first question that likely comes to mind is, “What criteria determine a nation’s economic power, or its economic scale?” The primary indicator serving as this benchmark is GDP, or Gross Domestic Product. So, what exactly is GDP? Accurately grasping this concept is essential for correctly understanding macroeconomics as a whole.
Understanding GDP Reveals the National Economy
GDP stands for Gross Domestic Product, literally meaning the total value of everything produced within a country’s territory. More precisely, it measures the market value of all final goods and services produced within a country during a specific period, expressed in monetary terms. To understand how this economic indicator, representing production activity, relates to economic prosperity, let’s examine the overall flow of a nation’s economy step by step.
On one side are businesses, and on the other are households, meaning the citizens. The role of businesses is to produce various goods—that is, tangible goods and intangible services. These produced goods and services are consumed by individuals forming households. The more citizens consume, the greater the potential for their standard of living or subjective sense of happiness to increase, which is closely linked to production activities.
First, businesses cannot create something from nothing. To create the goods consumed by households, they need raw materials, capital, and labor. All these elements used to produce goods are called ‘factors of production’. These factors are fundamentally provided by households to businesses. Businesses handle production, while households handle consumption and simultaneously provide factors like labor and capital to businesses. This is the basic structure of how goods and factors circulate within a national economy.
When examining this flow in terms of money movement, capital flows in the opposite direction to the movement of production and production factors described earlier. The amount households spend to purchase goods becomes revenue for businesses as payment for selling their products. Business revenue is then divided into costs and profit; costs are used to purchase various production factors. Notably, wages return to households that provided labor. Profits also accrue to households in the form of dividend income. Households then use this income to purchase goods and services, thereby enjoying life satisfaction. This constitutes the flow of money generated by national-level economic activity, the so-called ‘circulation of money’.
In this process, the income households receive as wages or dividends becomes ‘income’, while the money they use to purchase goods and services becomes ‘expenditure’. And that spending represents the value of goods produced by businesses, thus directly leading to ‘production’. Combining these three elements establishes the equation: “Production is spending, and spending is income.” Therefore, in the simplest economic model, GDP precisely matches the total income earned by the people and the total spending used to purchase what was produced.
The True Meaning Behind “The Economy is Good”
The reason the economy matters to us is that it is directly linked to our livelihood. While it’s often said that money can’t buy happiness, it’s hard to deny that financial comfort contributes to life satisfaction, much like the expression “Money is an iron, it smooths out wrinkles.” While economic satisfaction cannot fully explain human happiness, it is clearly a significant factor in explaining a substantial portion of it.
From a household perspective, economic satisfaction ultimately relates to how much income is earned and how diverse the goods and services that income can purchase are. However, as previously examined, production, income, and expenditure are interlinked. Therefore, a high GDP indicates vigorous production activity at the national level, which also means the average economic satisfaction of citizens is likely to increase.
When the economy improves, the economic flow discussed earlier accelerates, and the connections between these elements strengthen. When production and consumption are robust, companies expand employment to increase output, making it easier to find jobs and raising citizens’ incomes. Conversely, when the economy weakens, this flow slows down, and the connections between each stage weaken. This is why GDP is treated as the most important economic indicator in macroeconomics. When GDP improves, production increases, and as a result, consumption, employment, and overall income tend to improve together.
There was a time when the spread of COVID-19 severely restricted people’s gatherings and movement. As it became difficult for factories to gather labor, production faced disruptions, and dining out and nighttime consumption activities also contracted. With the flow of money weakening in various areas, the impact spread like dominoes to other economic activities, ultimately worsening the entire economy. The extent to which the economic situation deteriorated at that time can be confirmed through changes in GDP.
However, there are crucial points to note in this process. Companies invest in production facilities to manufacture goods. In this context, machinery or equipment produced by other companies is often used directly by the business itself, rather than being consumed by households. Furthermore, companies do not distribute all their profits to households as wages or dividends; they retain a portion internally, a practice known as ‘retained earnings’.
The government’s role is also crucial. At the macro level, the government not only intervenes in the market through policy but also acts as a direct participant in various economic activities. Examples include handling national defense and public safety, constructing roads, and managing parks. Using tax revenue as its funding source, the government carries out these projects, employs labor, and consumes goods and services produced by businesses. Therefore, from an expenditure perspective, we must consider not only individual consumption but also government spending and business investment.
Furthermore, exports and imports are indispensable elements in economic models. Some goods and services produced domestically are consumed by people abroad; this constitutes exports. Conversely, when South Korean citizens consume goods and services produced abroad, this becomes imports. Because exports and imports exist, the total amount produced domestically and the income actually earned by citizens do not perfectly match, but they generally tend to move in similar directions.
For example, it is known that as of 2023, soccer player Son Heung-min earned approximately 340 million won per week in the UK. Since Son Heung-min is a South Korean citizen, his income is included in national income. However, because this income was generated in the UK, it is not included in South Korea’s GDP. GDP is an indicator showing how actively domestic economic activity occurs at the national level. Therefore, it excludes income earned by its citizens overseas and is calculated based solely on production activities within the country. Conversely, to understand how much income citizens actually earn, it is necessary to examine other indicators like disposable income.
Is GDP a perfect economic indicator?
While GDP is a crucial economic indicator, it has several limitations that require careful interpretation. First, GDP represents the total output of an entire nation, and both national income and disposable income are also aggregate concepts. Even when calculating per capita GDP or per capita national income, these are ultimately just averages. That is, GDP is not an indicator that directly reflects the actual living standards of all citizens; it is closer to an indicator showing average living standards. For this reason, while GDP is closely related to efficiency, it has little direct connection to issues like equity or income inequality. To gauge the degree of inequality, separate indicators must be examined alongside it.
Furthermore, because GDP only shows the total sum of the entire economy, it cannot fully reflect the differing impacts on individual industries. For example, while the COVID-19 pandemic in 2020 dealt a major blow to the overall economy, industries like delivery services, vaccine and diagnostic kit production, and IT sectors centered on video conferencing systems actually saw significant increases in sales. Such industry-specific differences are difficult to grasp using GDP alone.
Alongside this, other indicators such as unemployment rate, employment rate, inflation, and exports and imports are also closely linked to citizens’ economic lives. These indicators are related to GDP but can move in different directions, giving each its own independent meaning.
Finally, GDP is calculated solely based on the market value of final goods and services traded in the market. To consolidate the production of countless goods and services into a single number, the only method is to convert them into monetary units based on market-determined prices. Consequently, labor not traded in the market is excluded from GDP. A prime example is domestic work. While domestic work performs a critically important social function, it cannot be included in GDP unless it is performed in a form where someone is employed and receives wages. This is not because the value of housework is denied, but due to the inherent limitations of how GDP is calculated. Environmental factors like pollution or carbon emissions are also closely related to living standards, yet there are clear constraints on reflecting them in GDP.
For these reasons, critical perspectives on GDP-centered economic evaluation have recently emerged. Nevertheless, GDP remains the most important economic indicator. Above all, GDP is intuitive and clear. It allows for a relatively accurate comparison of economic scale through the market value of all produced goods, and per capita GDP is closely linked to per capita national income, making it easy to understand. Creating a single, perfect indicator by synthesizing multiple factors is extremely complex, and its interpretation is also difficult. Therefore, the most realistic approach is to acknowledge the importance of GDP while understanding its limitations and consulting other statistical data alongside it.
GDP and National Happiness
Looking at the annual World Happiness Report, per capita GDP remains included as one of the key factors explaining national happiness. South Korea’s overall happiness index ranking generally hovers between 50th and 60th place, while its per capita GDP ranking among the happiness index components falls around 20th to 30th. It is a clear fact that the overall happiness index ranking is relatively low compared to the economic level.
While improving other factors like social support and freedom of choice in life is necessary to enhance the overall happiness of the population, it is equally important not to overlook the fact that a decline in per capita GDP is highly likely to lead to a corresponding decrease in national happiness. When GDP growth slows or declines, the overall economy faces difficulties, and during this process, the lower-income classes often suffer greater impacts than the wealthy. For these reasons, policies managing the macroeconomy hold significant importance for all citizens, and steadily increasing GDP becomes one of the core objectives of the national economy.
The OECD emphasizes the concept of ‘inclusive growth’. This approach advocates pursuing economic growth that increases GDP while simultaneously considering the improvement of quality of life for all members of society and addressing distribution issues, aiming to mitigate the deepening of income inequality and relative poverty. This reflects a rethinking of the past focus on growth above all else, while also being an attempt not to deny the importance of economic growth itself. Efficiency and equity, growth and distribution, are all values that the national economy must pursue simultaneously; excluding one does not help the other. From this perspective, the reason for paying attention to equity issues while also recognizing the importance of GDP is clear.
