Fundamentals of Macroeconomics Essay

Some of the terms that are frequently used in economics are; gross domestic product (GDP), real GDP, nominal GDP, unemployment rate, inflation rate, and interest rates. Gross domestic product is the money value of the nation’s productivity. GDP is the value of all finished goods and services produced within the country’s border. Real GDP is the market value of the final goods and services produced in a year. Real GDP means that it was adjusted for inflation so it will show a more accurate figure. Without real GDP our market values would look a lot higher than they really were and this helps us when trying to see what our productivity was. Nominal GDP is also known as the current dollar amount. It is the gross domestic product that has not been adjusted for inflation. Nominal GDP can be misleading because it does not adjust the inflation amount. For example if the nominal GDP figure showed that it shot up 10% but inflation has been 5% the real GDP has really only increased 5%. The unemployment rate is a percent of people who are not currently working but are willing and able to work or currently seeking. There are three different types of unemployment. The unemployment rate is figured by dividing the number of unemployed people by the number of people who are working and then multiplied by 100. Inflation rate is when prices for goods and services are on the rise. Inflation results in higher prices for the same amount goods and services one could have bought the year before for a lower price. Inflation gives high prices and lower purchasing power from consumers. The dollar amount becomes less than what it previously was. An interest rate is a percentage of the principle, which is the total amount of a loan, given by a lender for the use of an asset. The asset could either be a house or vehicle. An interest rate is usually based on an annual basis so this is also known as an annual percentage rate or APR. Somebody who has a high credit score shows that they have a good track record with other loans and monthly payments and will be given a lower interest rate. Somebody who has a low credit score is considered more high risk and will be given a higher interest rate. The three sectors; government, households, and businesses all have a circular flow between the three. The purchasing of groceries affects each one of the three sectors in different ways. It goes along with the law of demand and supply and the price level or inflation. Households decide and control what and how much to buy for consumption. The income effect has part of what consumers buy also. If there is an unexpected change of price this will affect the purchasing power of the consumer. Since households have control on what they buy and how much this will affect each business that contributes to the grocery stores. The competition in the grocery stores will affect the price of each item will affect what the household buys. Distribution also plays an important role in the economy by getting goods where people want them. If goods are in high demand this may affect the price level which may affect what consumers will buy. The government in turn will make some of their money on sales tax from the groceries. This tax will be used for expenditures that will go back into the economy. A decrease in taxes could affect the three sectors in a positive way. If there is a decrease in taxes there is a chance that more tax revenue is generated. The reason is because if people are bringing in more money into their households they will likely spend more money which will help businesses. If businesses are busy and making more money they will be more likely to hire more people who in turn will also be taxed which will help the government. A massive layoff of employees would hurt the economy and the three sectors. If people are out of work they are bringing in less money for their household. Since they will not have as much money as they are used to they are less likely to spend money which will hurt businesses. If businesses are not making a profit they may be forced to lay more people off. Because there are so many people laid off they will likely collect unemployment insurance which will cost the government more money.