The way the GAP is calculated varies depending on the economist, as well as the country. Real GAP Real GAP is adjusted for inflation. Using price levels for a basket of products or services, certain conglomerates of economists carry out the collection and analysis of vast amounts of data in order to measure inflation. By knowing the increase in price levels, economists can know the inflation ratio for the given period and subtract it from the Nominal GAP in order to find the inflation- adjusted or deflated GAP Nominal GAP The nominal GAP is the GAP before adjusting it for inflation.
Unemployment rate The actual unemployment rate is the percentage of people out of the workforce who are willing and able to work, but can’t get a job. The target unemployment rate is the lowest sustainable unemployment rate at the economy’s highest efficient production capacity. Inflation rate The inflation rate is the percentage rate of increase of the price levels measured. One common index is the Consumer Price Index or ICP, which measures the price levels changes in a variety of products and services including rents.
By measuring the changes in price levels, economists can also measure the devaluation of the runners, or its decrease in buying power. Interest rate The interest rate is the periodic cost of borrowing money or contracting a debt. In most financial scenarios is common to use an annual interest rate. Interest rates vary depending on the industry, but at the top levels of the economy interest rates are usually tied-up to an index, or to the rates of government bonds, etc. Economic activities and their effects Purchasing of groceries is a main necessity in any society.
The Bureau of Labor statistics shows food as a category covering 12 percent of the Consumer Price index Basket. Whichever way the scale tilts, it will affect a segment of society. When people purchase groceries at a steady pace, businesses that sell those products benefit from the income and might in turn create new jobs that would eventually generate taxes. When the government subsidizes the production of certain products, the cost reduction for the consumer creates more demand and generates more income to tax-paying jobs.
Similarly, when subsidies end, or demand for products decreases, so does the total available resources for production which generates scarcity and increases in price levels. Massive lay- offs could adversely affect the economy by decreasing the amount of taxes that are collected, increasing expenditures in social welfare programs, and pushing inflation up. Less people in the workforce also means less possible output for the economy, and less available resources for production. All of these factors can slow the economy, and as their magnitude increases, could even put the economy at risk of a recession.
The government is forced to institute programs to generate jobs, and households are stretched thin with the loss of a stream f income, regardless of whether or not there is another salary coming in. Decreases in taxes have both positive and negative effects. The general idea is that lowering taxes (particularly for businesses) can inject some growth to the economy. Reduced taxes allow companies to hire more workers, or to invest in research and development. Businesses in turn will add more income to the government in the form of extra taxes generated by the increased production.
Those jobs would also put some money on the hands of individuals, who could hen spend more to improve their quality of life, while also paying more to the government in the form of sales tax. This was the rationale behind President Bush’s tax cuts. On the other hand, others argue that those tax cuts should go directly to the citizens, not corporations, in order to more evenly distribute the wealth and stimulate the economy from the root.