Fundamental Terms
Gross Domestic Product (GDP) is the value of all goods and services produced in a country in a year. It is the sum total of private and public consumption, government expenditures, investments, and exports after imports have been deducted. It is used to measure economic progress in a country to establish if key economic sectors are performing well. GDP is also used to measure the standard of living of people living in a particular country by analyzing their purchasing power.
Real GDP is the value of all forms of economic production in a country after price changes have been adjusted to take note of inflationary and deflationary tendencies. It is the gross domestic product assessed through constant currency value changes in a country in a specific period of time. This measure allows a country to have an accurate portrayal of the economic situation it is experiencing, which helps it compare its economic growth with that of other countries.
Nominal GDP is the value of all forms of economic production in a country, which does not include adjustments in price changes. It is estimated at current price estimates and does not factor in inflationary and deflationary tendencies in the economy. It does not portray the actual economic situation in a country because it does not consider changes in currency value that happen in the period being reviewed (Colander, 2010, p. 86). It cannot be used to compare economic growth between different countries.
The unemployment rate is the percentage estimate of potential workers in an economy who are not employed in any sector but are willing to work. It is used to assess the ability of an economy to create more jobs for its workforce in a particular period of time. The unemployment rate is also used to evaluate the purchasing power of consumers in a particular economy.
The inflation rate is the percentage increase in prices of different commodities and services in an economy within a particular period of time. It is used to estimate the value of a currency and the purchasing power of consumers in a particular economy. An increase in inflation makes goods more expensive for consumers, while a decrease in inflation makes it possible for consumers to purchase goods at lower prices.
Interest rates are fixed rates in which borrowers are supposed to repay interest on credit obtained from financial institutions in a country. The interest rate is calculated as a percentage of the initial sum of money a borrower obtains from a financial institution, every year. They are used to determine the monetary policy of a particular country because they determine patterns of investment and inflation in the economy (Colander, 2010, p. 93).
Economic Activities
The act of purchasing groceries allows the government to obtain tax revenue from a grocery firm’s earnings in a specific financial period. The grocery owner can choose to save the money he obtains from selling groceries in a bank, which increases the amount of savings in the economy. If the business achieves positive growth after a few years, the owner may decide to employ more workers to help him run the business. This reduces the rate of unemployment in the country (Colander, 2010, p. 96). This makes it possible for his employees to provide for themselves and their dependents.
The grocery owner has to purchase fresh produce from farmers, which he sells to his clients. The grocery supply chain’s functions support other business owners, enabling them to stimulate economic activity in the country. An increase in demand for groceries abroad may compel the grocery owner to start exporting his products to other countries. This increases the number of foreign earnings the government gets from exports.
Massive layoffs of employees make an economy less productive, which reduces the number of tax revenues paid to the government. This makes the economy to have few investments because many people cannot save their earnings. This also causes a reduction in the purchasing power of people living in a country, because their earnings do not satisfy their needs. Therefore, some households may not be able to afford basic needs like food, shelter, and clothing. This increases people’s dependence on government-funded welfare programs to survive (Colander, 2010, p. 105). This may also make some business firms to close down due to a reduction in consumer expenditure. This discourages investors from opening new business ventures due to limited opportunities in the market. Financial services firms may also face difficulties in recovering money loaned out to borrowers who default on their loan payments.
A decrease in taxes will reduce government revenue from key economic sectors. This makes the government lack enough funds to provide crucial services to its citizens. However, this allows many households to purchase basic goods and services at low prices. A reduction in taxes allows many firms to reduce their operating costs, making them more competitive in their operations. This makes an economy favorable for both domestic and foreign investments, which stimulate economic growth (Colander, 2010, p. 107). This boosts confidence in the economy and opens up more opportunities for entrepreneurs willing to take advantage of positive economic prospects.
Reference
Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill.