Fundamentals of Macroeconomics, Essay Example

A1. GDP is the value of all the goods and services produced in a country within a year. GDP gives us an idea about the productivity of an economy. When GDP is higher than the previous year, it indicates the growth of an economy because it means the economy produced more goods and services than the previous year.

A2. Since GDP takes into the value of all goods and services, the increase in GDP may occur due to one of the two reasons. One is the actual increase in production of goods and services and the other reason is the increase in prices of goods and services. When the increase in GDP is due to higher prices, it may appear that GDP has actually increased even when the actual production levels might have fallen. Real GDP cancels out the effects of prices to reflect more accurate trends in GDP.

A3. Nominal GDP is a GDP figure in which the changes in year-to-year price levels have not been taken into account and instead all goods and services are recorded at their original market prices.

A4. Unemployment rate tells us what percentage of a country’s labor force is still looking for a job. For an individual to be counted as an unemployed, he should be actively looking for job. Those who may be taking a break from work and not seeking work are not counted.

A5. Inflation rate is the general increase in the average prices of goods and services over a particular period of time. Low inflation rates are inevitable and are a common characteristic of a healthy economy but very high inflation rates may pose a serious threat to the economy.

A6. Interest rate is the price that a borrower pays to the lender for the privilege of temporary supply of funds. Interest rate is denoted in terms of a particular period of time and is usually more for risky borrowers. It also varies directly with the duration of time for which the funds are supplied.

A7. When a buyer purchases grocery, the flow of products is from the seller to the buyer. The money flows from the buyer to the seller. Similarly, the government earns tax revenue on the grocery sales. The grocery also keeps the producers in business and they also pay the taxes on their revenues to the government. The government spends a portion of the revenue on activities such as education, training, and creating jobs. Higher salaries due to education and training as well as greater number of jobs means there are more people with income. The cycle repeats as greater demand for groceries again benefits sellers, producers, and the government.

A8. When there is a massive lay-off of employees, unemployment rates rise which also puts financial burden on the government in numerous ways. Unemployment benefits expenditure increases and income tax receipts decrease for the government at the same time. The government expenditure also increases due to greater spending on training and job assistance programs. Low employment level also means lower aggregate spending by the public and lower demand for products and services. Thus, the government’s sales tax revenues also decrease and because producers and sellers have lower income, the income tax revenues from corporations also decline.

A9. When taxes decrease, the government has fewer resources to spend on public welfare programs. The funding to essential services such as education is also cut and the government may also have to lay-off some public employees. Lower taxes also mean that the government may have to borrow more from the public as well as international lenders. This may drive up the interest rates which make lending expensive for both the businesses and the individual citizens. The businesses may respond by lowering investment activities and the individuals may lower their consumption activities.