Business Major

PART 1

There are several terms that are essential to understanding macroeconomics. They are gross domestic products (GDP), real GDP, nominal GDP, unemployment rate, inflation rate and interest rate.

Gross domestic product (GDP): The total market value of all final output of goods and services of citizens and businesses produced in an economy in a one-year period. In layman's terms, all the goods and services produced by citizens of a country for a one-year period.

Real GDP: The market value of final goods and services produced in an economy stated in prices of a given year. The real GDP is also used to determine the standard of living by businesses in a country and indicates whether or not a product or service will succeed in that country.

Nominal GDP: This is when the gross domestic product is calculated at existing prices without taking into account other factors such as inflation or interest rates. By comparing nominal GDP from year to year , it shows the amount the economy has grown or shrunk in dollar amounts but does not show how the buying power of those dollars have been affected. Also know as current dollar GDP or chained dollar GDP.

Unemployment rate: The percentage of people in the economy who are willing and able to work but who are not working. When the economy is booming, the unemployment rate is low but in a recession, the unemployment rate rises. It is the most closely watched statistic in a nation because it can indicate a weakening economy.

Inflation rate: A continual rise in the price level. The rate in which the level of prices for goods and services are rising but the purchasing power is falling. It measures how fast currency loses its value.

Interest rate: The price paid for the use of a financial asset. The amount charged by a lender to a borrower for the use of assets. They are usually charged on an annual basis and could include cash, consumer goods and assets such as vehicles or buildings.

PART 2

The circular flow model illustrates the flow of goods and services through the U.S. economy. There are three major components; consumers or households, producers now called businesses and the government. This model demonstrates the interdependencies of the different dynamics of the economy.

Government is the center of the flow of resources. It plays two roles in the economy. Its sets the rules that determine the relationship between businesses and households and they collect monies from taxes imposed on individuals or households as well as taxing goods and services offered by businesses. The money that is collected from these taxes is then in turn used to fund infrastructure services such as education, bridges and roads and public welfare.

The government also pays wages to some households who in turn purchase goods and services from businesses. Government also pays for goods and services from businesses. Businesses do pay taxes to the government, but through grants and subsidies from the government, this offsets those taxes.

Businesses provide jobs and pay households wages, which they in turn buy goods and services. As stated earlier, businesses do pay taxes but they are offset by the grants and subsidies from the government. Businesses decide what to produce, how much they need to produce and who they produce it for, They make these decisions based on self-interest that are influenced by market incentives.

Households are defined as a group of individuals living together and making collective decisions. In the circular flow model, households are also individuals who pay taxes and make purchases for goods and services. Households in the long run control government and businesses. They vote in elections and elect officials that will set for governmental policies that they are interested in. As they main buyers of goods and services, households determine what will be produced and how often by the businesses that they favor.

This all illustrates how a free market society works in the United States. Every component is connected and would not survive without the other.