Fundamentals of Macroeconomics Paper

Fundamentals of Macroeconomics Paper

Part 1. Economists use gross domestic product, unemployment rate, and interest rates as tools to determine economic trends and predict the future changes in the economy. They try to manipulate the frequency, duration, and extremes of those changes; a never-ending effort to minimize the roller coaster effect. Following is a list of loose definitions for those tools.

Gross Domestic Product (GDP) The gross domestic product, or GDP, is the amount of the nation’s net exports during a given term say a month or a year, expressed in a dollar amount. Economists measure, record, chart, and analyze the trends and fluctuations in the GDP. They use the data to gauge which state of the business cycle the economy is in: contraction, trough, expansion, or peak. This information influences whether businesses will save or invest, hire or fire, and survive or die.

Real vs. Nominal GDP The gross domestic product is expressed in two terms, real GDP or nominal GDP. The real GDP has been adjusted to account for inflation, and the nominal GDP has not been adjusted. Economists use the Real GDP to show practical relevance and to allow a comparison of apples to apples over time. Household consumption, firm investments, government spending, and net exports are often compared in terms of real GDP. The nominal GDP is a snapshot of a moment in the economy with no adjustments for inflation. Comparing a Nominal GDP snapshot from one moment to the next is like comparing apples to oranges because inflation plays a complex role in comparing monetary values and Nominal GDP does not account for that.

Unemployment Rate The unemployment rate is the number of people without work in any given jurisdiction. It’s expressed as a percentage. The United States unemployment rate is around 8.2%, whereas the state of Georgia is approximately 8.9% (Harris, ECO/372, June 13, 2012). Comparing the unemployment rate of a country to the population (GDP per capita) offer a glimpse into the countries standard of living. Although some very rich countries can still have high disproportionally high unemployment rates clustered in certain areas: a common result of uneven distribution of wealth, power, education, justice, opportunities, or other valuable resources. This determines how the government will approach spending and collected taxes.

Interest Rate Banks save and secure people’s money until they need it, lending some of that money to other businesses or individuals in the meantime. They loan the money to those borrowers at a fee called an interest rate. This is expressed a percentage of the principal amount the borrower owes. Banks generate a large amount of revenue this way. The clients who saved their money get paid a small amount of interest for investing the capital to make it all possible. The interest rate is set by the federal government or central banks. They adjust the interest rate as needed (based on many factors) in an attempt to manage a healthy economy. The interest rates vary between a myriad of bank products: auto loans, mortgages, savings accounts, IRA’s, etc. According to Bankrate.com (n.d.), today’s interest rate for a 30-year fixed mortgage is 3.63% a slight drop from last week’s rate of 3.68% (Today 's Averages, Mortgages). Obviously many business decisions, and loan purchasing decisions are heavily influenced by interest rates. If the interest rate is too high, cannot afford to repay the loan or refuses the loan because they don’t think it is worth the end cost.

Part 2. Households, businesses, and government are closely interdependent sectors of our economy. Households are individuals who earn wages, and influence which business thrive with spending power. Businesses are private organizations that produce products and services to sale to the public to help met the demand of their wants and needs. Government is a organization of elected or appointed officials to manage the law and oversee/facilitate a healthy balance of the economy. Everyday occurrences like purchasing groceries, job layoffs, and tax decreases cause a domino effect of changes in each sector.

Purchasing Groceries Households purchase groceries to support their need to eat. The household pays a sales price that goes to the grocery business, plus a state tax in most states. The business the household bought groceries from makes a profit and gains a stitch of economic strength. The government pays for operations tax dollars they collect. So economically strong businesses like the most popular grocery chains, like Super Wal-Mart, have political influence because they support the welfare of many households through employment wages, and they pay a lot of taxes. Those businesses can also afford to influence politicians with voluntary monetary contributions whether or not it is in the best interest of social welfare. Households and businesses expect the government to maintain a healthy balance for them all to thrive.

Massive Layoff of Employees When businesses do not make the profits they were hoping for, they may cutback on expenses not excluding salaries and wages. Massive layoffs occur when there is economic trouble, and the affected households must find work with other businesses, or experience a deficiency in funds to support their utilities and welfare. It’s in the best interest of the households that businesses thrive so that the businesses continue to pay wages. Households resort to spending cut-backs which decreases profit margins for businesses they patronize, possibly causing more layoffs. It is in the best interesest of businesses that people households can make enough money to spend some at their company. Finally, the loss of household jobs and business profit means the government loses a major chunk of funding form income taxes. Decrease in Taxes When the government loses a major chunk of funding form income taxes, the services they provide are eliminated, underfunded, or stretched too thin. This can increase crime, high school drop-out rates, and even unpaid medical bills causing a cycle of poor social and economic problems. When the government decreases taxes, this can cause a downsizing of the services it offers, or increase an already incredible deficit. But most likely it will promote spending among households. This leads to profits, growth, and hiring among businesses. People train and prepare for those jobs, eliminating the need for some of the social services offered by the government, and eliminating some crime and social woes. Ultimately, if the businesses and households make out well enough from the tax decrease, the government will still collect a healthy amount of income taxes.

References
Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.
Harris, Crispus. June 13, 2012. Classmate input from group discussion exercise in ECO/372 workshop.
Bankrate.com. (n.d.). Today’s Averages. Mortgages. Retrieved from http://www.bankrate.com/partners/selaol/mortgage_averages.aspx.

References: Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin. Harris, Crispus. June 13, 2012. Classmate input from group discussion exercise in ECO/372 workshop. Bankrate.com. (n.d.). Today’s Averages. Mortgages. Retrieved from http://www.bankrate.com/partners/selaol/mortgage_averages.aspx.