Fundamentals of Macroeconomics - Assignment Example

Gross Domestic Product is expressed in terms of output producing factors; labor and capital, or the expenditure on the output by the government businesses and individuals (Schnatz, 2000). Real GDP refers to the measure of the economic value of output adjusted to accommodate the changes in price, deflation or inflation.   In simple terms, real GDP refers to the total output (in a country) of both goods and services, which have undergone modification to allow for changes in price. The adjustment involves a transformation of the nominal GDP to an index representing the total output.

Nominal GDP describes the GDP evaluated at the current market prices. Therefore, the nominal GDP encompasses all the changes in the market prices within a certain year. Normally, the nominal GDP will have a higher figure than the normal GDP value. It can also be referred to as ‘chained dollar GDP’ or the ‘current dollar GDP’. The unemployment rate is the percentage of the unemployed workforce that is actively seeking for a job and has the will to work. High employment rate indicates a weakening of the economy while the falling rate is a sign of growth in the economy and normally characterized by high inflation and demands for an increase in the interest rates (Schnatz, 2000).

The inflation rate describes the percentage rate of the change in the price level within a given time, usually a year.  Inflation also rate refers to a sustained increase in the general price level for both goods and services and it can be measured in terms of annual percentage increase. Inflation rate necessitates calculation of the increase in wages and real interest rate. Interest rate refers to the rate charged for use of the money borrowed from a lender for use of the asset(s) as cash, building, and vehicles among others.

It is calculated from the division of interest by the principal and expressed in terms of the annual percentage for simple interest. For compound interest, the rate is expressed in compounded form based on the number of years (Schnatz, 2000). PART 2 The economy in many countries comprises three sectors; government, households, and businesses. These three sectors tend to be inter-related, and they connect the economy in a country to the world’s economy. The relationship enhances the flow of goods and services among the countries involved.

Purchasing groceries affects the government in that it directly affects the economy. When the purchase of goods and services is high, the corresponding rate of economic growth will be high due to the taxes involved thereof. However, the decreased rate of grocery purchasing will slow down the rate of economic growth. The government policies on the farming industry adversely affect the purchasing of groceries. Farmers may find it challenging to produce hybrid goods and on a large scale. Most households will be compelled to consume these products because there is no other alternative.

Businesses will be affected since the availability of the goods will be dictated by the government police, and whether the policies affect the farming either positively or negatively, businesses will have to operate with the goods available by then (supply). Therefore, profits will either be high or low depending on whether businesses meet the demands of the households’ consumption patterns.  Many businesses are affected by the mode of production of their goods and the people who will consume the goods (Willis, 1991).

The massive layoff of the employees negatively affects the government. The treasury will be affected in that less money will be going to their kitty. As a result, interest rates will rise, and there would be a corresponding decrease in market value. The purchasing power of households will be affected due to instability in income. Businesses will suffer when the purchasing power of customers is affected, and there would thus be decreased profitability in many businesses (Willis, 1991). The decrease in taxes affects the government negatively.

Most of the government money comes from taxes. Therefore, a reduction in taxes means less money to the treasury, and consequently, various activities of the government will be affected. However, this favors the household where the family income is lowly taxed, hence purchasing power improves. Many businesses may be affected positively by a reduction in taxes. More profits may be registered since the taxes will be less, and consumers will have an increased purchasing power for the goods.