ECO/372 Macroeconomic Terms and Concepts Macroeconomics study’s the overall level of production in the economy. “Economists assess the success of an economy’s overall performance by studying how it could achieve high rates of output and consumption growth” (Macroeconomics, 2008, para. 5). In the following paragraphs, various aspects of macroeconomics will be analyzed. First, the United States (U. S. ) functions as a market economy and is affected by fluctuations in production output levels of the gross domestic product (GDP), inflation and interest rates, and issues of unemployment.
Second, economic models help explain visual concepts, one in particular is the circular flow diagram that illustrates the interaction of households, businesses, and governments in the U. S. market economy. Third, an analysis of how the Florida Hospital organization has been affected increased unemployment and the current economic conditions of the economy. Economic indicators Production output levels of the U. S. economic market fluctuates up and down and is referred to as the nominal GDP, which is the total market value of all the final goods and services produced in current year prices.
The GDP is the sum of the expenditures made by the four sectors of the economy; consumption by households, investments by the business sector, government spending by the government sector and net exports by the foreign sector. To express the formula with the expenditure approach is as follows. GDP = Consumption + Investment + Government spending + Net exports, or GDP = C + I + G + (X – M) The real GDP is a more accurate measurement of the value of goods and services because it takes into consideration any changes in price levels, such as inflation.
Real GDP is defined as the sum of all the current goods and services produced, but measured in base year prices. When measuring how much the price level has changed from one year to the next, a price index is created, called the GDP deflator. The real GDP is illustrated in the following formula: Real GDP = (Nominal GDP ? GDP deflator) x 100 An upward drive in the price level of goods and services is called inflation. “The price level is an index of all prices in the economy. Even when inflation itself isn’t a problem, the fear of inflation guides macroeconomic policy” (Colander, 2008, p. 521).
Higher prices tend to drive interest rates up which decreases spending in the household, business, government, and foreign sectors. Interest rates is defined as, “the prices paid for the use of a financial asset and are key variables in the financial sector” (Colander, 2008, p. 634). “The unemployment rate is the percentage of people in the economy who are willing and able to work but who are not working” (Colander, 2008, p. 512). When the unemployment rate is high, people earn less and have less money to buy products and services, so businesses lower their prices to sell their goods, which causes deflation.
Circular Flow Diagram The circular flow diagram (see below) illustrates the flow of money between the household, businesses, and the government sectors. Households and businesses operate in a pure capitalistic market with the interaction between the market of goods and services and factors of production that creates a circular flow of money between the two sectors. The government sector interacts with households and businesses along with the goods and services market, and the factors of production market.
In the goods and services market households spend their money for products and services (consumption) and the flow of money goes into businesses. In the production market, households supply labor and other factors of production to businesses that pay households for resources such as wages and other resources they need for business operations. The flow of money goes into the government when households and businesses pay tax, which makeup 80% of the federal government revenue (Colander, 2008, p. 65).
Money flows out of the government to pay businesses for subsidies and households for social security and welfare. The government interacts with the goods and services through the exchange of money for needed resources and interacts with the production market through the exchange of money for needed factors of production. Circular Flow Model [pic] Effects of recession on an organization The U. S. market is currently experiencing an economic downturn in the economy causing businesses that provide goods and services to cut costs.
One of the economic indicators affecting the Florida Hospital organization, located in Central Florida, is the rise of unemployment in the economy. A rise in unemployment means more people are uninsured so Florida Hospital has experienced a decline in elective surgical procedures and earning less revenue. The hospital receives a large percentage of Medicare and Medicaid reimbursement from the government, and as the government cuts spending in these areas, the hospital will receive less funding as well.
Economic indicators measure the growth of a countries income, the aggregate price of all products, and unemployment rates. The circular flow diagram illustrates how businesses, households, and governments interact between the goods and services and production markets. Cost cutting measures with the Florida Hospital organization was because of less services provided and less flow of money coming into the company, which means they will have less need for labor and less spending.
The economic indicators, the circular flow diagram, and the example of an organization affected by the current economic conditions helps give an all analysis of the study of macroeconomics. References Colander, D. C. (2008). Economics, 7th ed. , Burr Ridge, IL: McGraw-Hill/Irwin Macroeconomics. (2008). In W. A. Darity, Jr. (Ed. )International Encyclopedia of the Social Sciences, (Vol. 4). (2nd ed. , pp. 539-543) Detroit: Macmillan Reference USA Retrieved March 19, 2010, from Gale Virtual Reference Library via Gale: http://go. galegroup. com. ezproxy. apollolibrary. com/ps/start. do? p=GVRL&u=apollo
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