The national output is a measurement of the amount of goods and services a country produces, referred to as the gross domestic product (GDP), and provides economists with a picture of the economy at any given time. GDP is a useful measurement for economists as it can be compared to previous figures to provide an idea of the level of growth, or decline, that an economy is experiencing.
Unemployment measures the number of workers in the labor pool that are without work. GDP and employment levels are closely linked, a higher GDP suggests more demand for goods and larger labor force to produce them. However, a declining GDP has the opposite affect, less workers are needed to produce the amount of goods to satisfy the economy, therefore the unemployment level rises.
Inflation is the measure of how much prices have risen, or fallen, over a given time. Inflation is measured by the consumer price index, an averaged price of goods such as transportation, medical services and common consumer commodities, compared to previous figures. This shows the direction prices are moving over a period of time. Inflation is important to an economy, too high inflation and prices are out of control, making goods to expensive. Negative inflation suggests a weak economy that is in decline.
Governments have a number of tactics at their disposal to control the economy. Fiscal policy simply refers to decisions on government spending levels and tax rates. If a government reduces public spending and increases taxes then effects are felt in the macro-economy in the form of job losses and reduced GDP as demand for goods falls. Reducing taxes and increasing public spending injects cash into the economy, raising demand and increasing the GDP.
Monetary policy refers to the control of the money supply by a government regulatory body or central bank by setting interest or increasing cash injections. By controlling interest rates and the supply of money in an economy a government can stimulate or reduce spending as required. If interest rates are lower, money is cheaper to borrow and more spending occurs, increasing GDP. If interest rates are higher then people will save cash they already own or cannot afford to borrow so spending will theoretical decrease. The battle for governments is to maintain an equilibrium in the economy by employing a mixture of both fiscal and monetary policies.