Macroeconomics Case

Describe the following terms in your own words.

Gross domestic product (GDP) - This is the total monetary value of both products and services produced in a country in a specific period though it is calculated annually. It comprises of all public and private consumption, government outlays, exports and investments exempting imports within a defined area or territory.

Real GDP- This is inflation –adjusted measure that reflects the value of all products and services produced in a given year. It accounts for changes in the price level, giving more accurate figure, unlike gross domestic product.

Nominal GDP- This is gross domestic product that has not been adjusted for changes in price levels or inflation.

Unemployment rate- this is the percentage of total labor force that is not employed but willing to work and actively seeking employment.

Inflation rate- this is the rate at which general level of prices of goods and services rises hence reducing the purchasing power.

Interest rates- This is the amount charged by a lender to a borrower for an asset use, expressed as a percentage of principal.

Consider the following examples of economic activities:

Purchasing of groceries

The purchase of groceries by households will increase the demand for the same. This increased demand will cause businesses to increase their production and hire more people to meet the rising demand. This will generate additional customer spending. Increased personal consumption and business investments increase gross domestic product. This increased consumer and business activity will generate more tax revenues for the government especially in the long- run.

Massive layoff of employees

When employers lay off a large number of workers, generally the economy suffers because these workers cannot purchase goods and services as before. The consumption levels of households reduce since they will have adjusted to a new lower budget. Income in the business reduces due to reduced demand by households. Productivity also goes down. This is because when workers are laid off, the morale and engagement of workers who were not laid off goes

down and business production of the respective companies reduces. Government revenues are affected negatively by massive lay offs. The tax collected by the government goes down. Moreover, taxes collected from businesses also reduce. This causes the government to reduce its spending or turn to borrowing to finance its debt.

Decrease in taxes

W hen taxes decrease; this increases disposable income for households.