Fundamentals of Macroeconomics Case

Fundamentals of Macroeconomics

ECO/372

Fundamentals of Macroeconomics

In this paper, there will be definitions of terms that relate to the fundamentals of macroeconomics. This paper also contains specific examples that define how said terms affect households, businesses, and governments. The flow of resources from one entity to the other is diagramed verbally in this paper.

Macroeconomic Terms

The first defined term is gross domestic product (GDP). GDP is a calculated measure of all domestic goods produced and services provided. It is calculated from a set formula. It takes the sum of consumer spending, industry investments, the ratio of exports to imports, and government spending to get the GDP. The final sum could be positive or negative. GDP has two different types. The first is real GDP. It is GDP that has inflation costs adjusted into the equation. The second GDP is nominal GDP. It is calculated by today’s existing prices. Using this train of thought, nominal if current and real is inflation adjusted GDP.

The next term is the unemployment rate. It is defined as the number of people looking for work that are willing and able to perform work. This term may not be as accurate as one may think. There may be many more unemployed that have stopped looking for employment for various reasons.

Next is the inflation rate. It is the measurement of the cost of specific goods or services rising while the consumer’s purchasing power is decreasing. Economists say that a healthy inflation rate is two to three percent. If the inflation rate soars, the banks and government use different things to try to get control over the inflation. They can do this through changing interest rates. Interest rates are another term in macroeconomics. It is defined as charged amount from a lender for a loan covering a certain set period of time. The rate of interest is the determining factor of whether a loan is affordable or unaffordable. The interest rate will be lowered in a struggling economy so try and boost the economy.

Economic Activities

Many everyday activities affect the economy. For this papers purpose, it will look into three activities. The first being consumers purchasing groceries. The second one is a massive lay off of employees and the third one is a decrease in taxes. All of these activities affect on another and control the flow of resources of each other. The basic activity that most can relate to is buying groceries. Every household has to do this activity on a regular basis. This takes cash flow away from the household budget. This gives the government cash flow from the taxes charged on the purchase amounts from the household. If the food taxes increase, the consumer has less buying power due to having less money to buy food in order to pay the taxable amount on the food. If the consumer loses the source of income due to a lay off, they have less money to purchase groceries and the government collects less sales tax. If the services and products are not being bought because the consumer has less money to spend, a large lay off of the work force could happen. This is a very dependant system and it has many polices in place to keep it in check.