Fundamentals of Macroeconomics - Research Paper Example

Fundamentals of macroeconomics Introduction Economics refers to the knowledge of generation, utilization and transfer of resources while macroeconomics defines economic factors that have wide scoped effects. This paper to defines macroeconomic terms, and describes effects of identified activities on different stakeholders, and flow of resources across the entities following the activities.Definition of termsGross domestic productGross domestic product defines the value of a country’s total terminal production of formally recognized items in a given period.

It is therefore a cumulative worth of a country’s recognized goods and services and can be determined from total derivable revenues from a country’s production in a given period (Mankiw, 2011).Real gross domestic productReal domestic product however defines the value of a country’s total production in goods and services at constant base prices of the commodities. Such a basis may be each commodity’s price in a given year (Mankiw, 2011).Nominal gross domestic productNominal gross domestic product refers to the value of a country’s total valuable productions in a given period and at the period’s prices (Mankiw, 2011).

Unemployment rateUnemployment rate refers to the proportions of a population that are not in employment at a given period (Mankiw, 2011).Inflation rateInflation rate defines the rate of increase in prices of commodity based on base index prices and is periodically calculated (Mankiw, 2011).Interest rate Interest rate defines the proportion of money that is attributed to, and is charged on its application. It is calculated in percentages. Effects of activities on government, households, and businessesPurchasing of groceriesPurchasing of groceries reduces amount of money among the purchasing households and increases amount of money held by businesses.

It also increases government revenues through tax on the groceries. It however has no economic value on households and business because it involves exchange of similar values. The government however derives economic gain in the taxes (Mankiw, 2011).Massive layoff of employeesThe layoff reduces households’ revenues because of its unemployment effect on members of households. It also adversely affects businesses through reduced revenues because of households’ lower spending power. Layoffs also affect the government through lost revenues in income tax.

The government’s revenue is further reduced because lower purchasing power into reduced demand results in low revenues from value added tax (Mankiw, 2011).Decrease in taxesDecrease in tax has the effect of increasing households’ money reserves from both direct and indirect taxes. A decrease in direct tax results in higher income and a decrease in indirect taxes leads to lower commodity prices that allows for more savings by households. The effects of reduced tax on households also mean their increased purchasing power that suggests an increase in sales and revenues among businesses.

The government however losses revenues that it would however earn at higher taxes (Mankiw, 2011).Flow of resources across entitiesPurchasing of groceriesPurchasing groceries has no net economic flow between households and businesses because it is a mere exchange of equivalent values between the two parties. Money, however, flows from both businesses and households to the government in taxes (Mankiw, 2011). Massive layoff of employeesMassive lay off does not identify any transfer of resources among the parties, but locks resources that remains unexplored (Mankiw, 2011).

Decrease in taxesLowering taxes identifies a virtual transfer of financial resources from the government to both households and business as the government foregoes its revenues that are retained by the two entities (Mankiw, 2011). ReferenceMankiw, G. (2011). Principles of macroeconomics. Mason, OH: Cengage Learning.