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In this essay I will describe the fundamentals of GDP, unemployment rate, inflation rate, and interest rate. Also I will be explaining how some common occurrences such as buying groceries, massive layoffs, and a decrease in taxes affect the government, businesses, and even you. Lets start with GDP. What is GDP you ask? GDP stands for Gross Domestic Product and represents the total market value, in dollars, of goods and services. There are 4 main components that affect GDP; consumption, investment, government spending, and net exports.
Consumption is very straightforward and it just means the total number, in dollars, of goods and services purchased by households. On the opposite side what do you think government spending is? You got it, it’s the amount of money used by the government to buy goods and services as well. While the amount of money spent on additional production is labeled as investment. Net exports are the only component that is kind of tricky. To get the amount of spending for net exports you take the amount of goods and services that are produced in the United States and subtract the amount of goods and services purchased over seas and abroad.
All of these components represent the flow of the economy, Now that we understand what GDP is in a nutshell lets move on to another concept. All GDP does is measures final output. Final out put is goods and services measured in there final use. Any goods and services not in there final use are considered intermediate goods.
So any intermediate goods (i. e. wheat sold to a wheat company or cotton to a sock company) are not calculated into total GDP. There are 2 different ways to represent final output, real GDP and nominal GDP. Nominal GPD is the amount in today’s dollars of GDP.
Real GDP is the nominal GDP plus the amount of money it would take to account for inflation. Unemployment rate, inflation rate, and interest rate are my next points of discussion. Unemployment rate is the rate of people in the economy that do not have jobs. When there are to many workers and not enough jobs the ratio of that is how we find the unemployment rate also taking into account that people who are un able to work. (i. e. sick and drug addicts) Inflation rate is the percentage that money grows over any given point of time.
For example if I buy a gallon of milk at 3 dollars this year and next year I buy the same gallon of milk for 3 dollars and 25 cents, than the rate of inflation for that gallon of milk would be about 8%. Interest rate is the amount of money, in percentage, charged for its use. That can also be broken down to real and nominal interest rates. Nominal interest rate is the rate of interest charge to the barrower now at this current day and real interest rate is calculated by the nominal interest rate minus the inflation rate.
As I stated before GDP has a flow to it. Economic activity such as buying groceries, massive lay-off, and a decrease in taxes can cause ripples in all levels of the economy. If I were to buy a bag of groceries that money turns into profit for the business. That profit turns into investing into new products. With companies making more money from new product the economy can grow which can cause the government to increase taxes to help slow down unnecessary spending and decrease inflation.
With a massive lay-off it will slow spending down because people are not making as much money as before. The repercussions of that is demand goes down and businesses start to fail but on the bright side it would cause the government cut taxes and increase spending to help boos the economy out of the rut that caused the mass lay-off in the first place. A decrease in taxes will cause more consumer spending. When taxes are decreased the government can’t spend as much as they want or need to on public services such as roads and school.
This, in turn, can cause unemployment rates to go up from the local government jobs and contracts that would seize to exist. It will also encourage consumers to spend more money causing the economy to inflate. As you can see we covered a lot of basic concepts in the realm of macroeconomics (read about three three macroeconomic goals). Even with the little bit of knowledge in this paper we can see that economics is all intertwined with itself. There can never be one thing without the other. If there is the economy becomes unbalanced and things start to get bad. I hope you have enjoyed my paper on the Fundamentals of Macroeconomics!
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