1.1 What is meant by the national economy?

The national economy can be defined in many different ways, depending on the angle chosen. Here, the national economy is described in national accounting terms.

A one-person household, a business firm with a staff of one hundred and a local municipality with a population of one thousand may not otherwise have very much in common, but when they each make independent economic decisions and take part in economic activity, they can be described as economic units.

A distinction is usually made between three groups of economic units: households, business firms or enterprises and public authorities. A household consists of one or more persons who share the same finances (e.g. the members of the same family) and who make joint decisions about their finances. Business firms regularly make decisions about their own finances and operation, such as the production of goods and services, buying and selling. The public sector consists of central government, local governments, joint municipal authorities and social security funds. Each of these units makes independent economic decisions in its respective area of competence.

National economy, then, refers here to the economic activities of all economic units within one nation-state or economic area. It consists of the activities of a very large number of units. For easier analysis these units are grouped into larger clusters: for purposes of studying the whole national economy it is unimportant to know what an individual household or business firm is doing, instead we need to identify the distinctive types of activity in each group and the features they share in common. The Finnish household sector consists of a total of some 2.4 million households.

Examples