Representative Goods and Sectors

Macroeconomics studies the economy as a whole. Economists observe that the output levels, prices, and employment of all goods and services tend to move together in the same direction. Because of this, it becomes convenient to assume that the entire economy produces just one single commodity, called the representative good.

• Its production level = the average production of all goods and services.
• Its price = the general price level of the economy.
• Its employment level = the overall employment situation of the economy.

A single representative good can hide real differences between goods:

• Agricultural goods and industrial goods have very different production conditions — farming depends on land and seasons; manufacturing depends on machines and capital.
• The labour of a manager is very different from that of an accountant — treating both as one "representative labour" ignores this distinction.

To capture these differences, macroeconomics uses three types of commodities as representatives:

• Agricultural Goods — e.g., wheat, rice, cotton.
• Industrial Goods — e.g., steel, automobiles, textiles.
• Services — e.g., banking, education, healthcare.

Each type has a different production technology and different prices.

For each of the three types, macroeconomics determines how the following are decided:

• Output level
• Price level
• Employment level

• Output, prices, and employment tend to move in the same direction — this justifies using one representative good.
• One representative good is a simplification and can overlook real differences.
• Macroeconomics uses three representative goods: agricultural goods, industrial goods, and services.
• Each differs in production technology and price behaviour.
• For each type, macroeconomics determines output, price, and employment.