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Fundamentals of Macroeconomics - Essay Example

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Fundamentals of Macroeconomics
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Fundamentals of Macroeconomics Fundamentals of Macroeconomics. This paper defines a number of terminologies used in the field of economy. In addition, the paper looks into implications of some economic activities on the government, households, and businesses. These economic activities include purchasing of groceries, massive layoff of employees and decrease in taxes. Terminologies defined in this paper include gross domestic product, real gross domestic product, nominal gross domestic product, unemployment rate, inflation rate, and interest rate.
Definition of terms.
Gross domestic product.
Gross domestic product is the market value of goods and services that a given country produces. GDP is mainly applied in determining the stability of a country’s economy. Calculations of gross domestic product are commonly done using the expenditure method, which adds total consumption, investment, government spending and net exports (Dolan, 2010).
Real gross domestic product.
Real gross domestic product refers to gross domestic product evaluated based on the prevailing market prices in a given year. Real GDP can also be regarded as inflation corrected gross domestic product. Real GDP has the capability to indicate changes in the price level with a high accuracy compared to nominal gross domestic product (Dolan, 2010).
Nominal gross domestic product.
This refers to the gross domestic product figure that has not received any adjustments on inflation. It is also the value of services as well as goods produced in a given country after the final stage of production.
Unemployment rate.
Unemployment refers to the percentage of the total labor force that is unemployed, but is searching for employment and willing to work (Dolan, 2010).
Inflation rate.
Inflation rate refers to the percentage at which the general level of prices for goods and services increase reducing the purchasing power (Dolan, 2010).
Interest rate.
Interest rate refers to the percentage of principal a lender charges a borrower for money or assets given. Interest rates are usually charged on an annual basis.
Effects of economic activities.
Purchasing of groceries.
Increased purchase of groceries by households is a clear indicator of their improved economic status. This fact enhances growth of existing businesses as well as the emergence of new investments. In such a situation, the government benefits from increased tax collections obtained from value added tax and taxation from investments (Dolan, 2010).
Massive layoff of employees.
This refers to the reduction of the number of people under employment in a given country. The implications of undertaking such a step include negative impacts on the government, households, and businesses. Massive layoff of employees means that a large number of people within a country will have a reduced purchasing power. In such situations, household living standards will come down; businesses will close down due to low purchases, and government’s revenue collection will go down. Economically stable citizens within a country comprise a key pillar of a country’s economy (Dolan, 2010).
Decrease in taxes.
Revenues generated from taxation are the principal financers of the government budget. Therefore, a decrease in taxes implies that the government will strain in meeting its expenditures. On the other hand, reduced taxation implies that households will have a high income and the cost of starting a business will reduce. With high income, households’ purchasing power will be high; this will attract more businesses that can establish easily with low taxation (Dolan, 2010).
Dolan, E. G. (2010). Introduction to Macroeconomics. New York: BVT Publishing. Read More
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