Fundamentals of Macroeconomics - Economics Essay Example
The gross domestic product (GDP) is defined as the market value of all goods in any country at any specific time. The gross domestic product is frequently used to establish a country’s wealth or standard of living. Even though the GDP is supposed to determine a country’s economic health, many nonbelievers think the gross domestic product does not account for the underground economy. An underground economy would consist of transactions that are no reported to the government. The first thing that comes to mind as an example would be restaurant servers. Not all restaurants require servers to claim all of their tips.
So well then gross domestic product is calculated, these transactions are not taken into consideration. The gross domestic product is determined by finding the total consumer(C), investment (I), and government spending (G), plus the value of exports (X), minus the value of imports (M). The gross domestic product equation looks like this GDP= C+I+G+(X-M). Nominal GDP is referred to a figure of the gross domestic product that has not yet accounted for inflation. This term is also often identified as current dollar gross domestic product. The nominal GDP will always be higher than what the gross domestic product really is because of inflation.
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Nominal gross domestic product is usually used to calculate the entire production in a country. When someone thinks of unemployment, they think of someone with no job or income. However, there are different ways to look at unemployment. There are people who are unemployed but are not trying to look for a job. Then there are people who are unemployed but continuously looking for employment. When determining the unemployment, we take the total number of people who are unemployed but aggressively looking for some type of employment. The lower the unemployment rate is the better off the economy is.
If the unemployment rate is increasing, it a good indicator that the economy is not doing as well as it could be. The inflation rate is a way to show the rise in the prices of goods and services over a specific amount of time. The inflations tend to increase when there is an excess of money entering the market. When this happens, the price of goods and services must be raised in order to compensate for the decreased value of money. An interest rate is a fee usually applied to something because of the use of money. Interest rates are usually in the form of a percentage. Interest rates can be good as well as bad for consumers.
When a person takes out a loan, there is usually an interest rate placed on top of a loan. For example, if a person takes out a $2000 loan and is charged 50 dollars per year for the loan, the interest rate would be 2. 5%. Another example of interest rates would be the rates that are applied to a savings account. If someone was to put money in a savings account it would accumulate interest over time. Depending on the type of account the interest rates will vary. Purchasing of groceries is a necessity for every household because people cannot go without the goods for everyday use.
When people have a greater amount of money, they will tend to spend more at the grocery stores, which will benefit the government. If the economy is weakening and inflation is on the rise, the government may have to offer assistance to households who cannot afford to purchase their groceries. Businesses want the economy to do well because they want to stay competitive and relevant in the grand scheme of things. Businesses are always looking for way to keep the consumers coming back to their companies. They can do this by offering goods and services at a discounted prices or creating temporary sale items to compete.
Massive layoff of employees can affect household because it will decrease the amount income each household brings in. When a household does not have a regular income, it affects the way they spend their money. Households will have to cut costs and budget their money wisely. When massive layoffs take place is has a great affect on the government as well. The government has to compensate for the large number of recently unemployed people. This increases government spending dramatically because now they have to use money for people who are collecting unemployment rather than on something else.
Since households have less income, they are unable to put their money back in the economy. Even though businesses are saving on their own costs by laying off employees, they are not bringing in as much because people have less disposable income. When there is a decrease in taxes, households have a greater income which in turn allows them to spend their money at business. When households have a higher income, it lessens the amount of money the government has to provide for households. Business will be able to stay competitive in the market because people will have more money to spend on their goods and services.