Why are economic affairs important?

Economics cover, among other things, how we utilise our labour force and various resources to produce goods and services. We often call production economic goods. Economics also deal with how these goods, that is to say, the proceeds of labour and resources, are distributed. Numerous companies and private entities handle a large part of production, and public entities, i.e. the state and local governments, handle a large part of services that are considered important goods, such as healthcare and education. Economic developments have a significant impact on the well-being of residents in every country.

The gross domestic product (GDP) of a given country is the total value of all goods and services produced for final usage within its borders. Economic growth is the change in GDP in real terms (i.e. at fixed prices), usually between years. A recession generally occurs when GDP shrinks between years, i.e. when economic growth is negative. GDP is not an unequivocal measurement of a nation's prosperity, partly because it does not take into account all production, such as that which takes place in households for private use. Nor does it take into account whether the production has a negative impact on the environment, how income is distributed within the economy, nor life expectancy. In general, however, GDP is highly correlated with other measures of living standards.

The potential output of an economy is defined as the level of production that corresponds to the full utilisation of all factors of production in the economy, i.e. the capital stock, labour force, and available technical know-how. In the short term, the economy's overall demand may cause the economy's level of output to differ from its production capacity. When domestic production exceeds production capacity, there is said to be a positive output gap. This creates tension in the economy, which manifests itself in excess demand in product and labour markets, ultimately leading to increased inflation. If, on the other hand, production is below capacity, a negative output gap is created in the economy which, all else being equal, reduces inflationary pressures.