Fundamentals of Macroeconomics

Fundamentals of Macroeconomics

The terms gross domestic product (GDP), real GDP, nominal GDP, unemployment rate, inflation rate, and interest rate are basic terms in the understanding macroeconomics. Understanding these terms and how they will affect the economy will provide a base for future studies in business management. These terms also represent factors that affect business practices, government programs, how individuals, and families spend their money. Investors and politicians will also use the information to make decisions that can either help strengthen or weaken a country's economic current and future situation.

Part One

Gross Domestic Product (GDP), GDP is generally used as a sign of the financial health of a country as well as to measure a country's standard of living. The GDP is calculated on annual basis and represents the monetary value of completed goods and services for a country during a specific period. Components used for calculating the GDP are grouped into four categories; Consumption (C), Investments (I), Government spending (G), and Net Exports (exports (X) minus imports (M)). The formula for calculating the GDP is; GDP = C+I+G+(X-M). Most other countries have a similar process for calculating their GDP, which allows economists to compare GDP levels and approximate a country's power and size. The GDP is only an estimate; the GDP does not incorporate underground financial transactions such as prostitution, illegal drug sales, and workers paid in cash for their services. Even stay-at-home spouses provide a monetary value that could be calculated into the GDP.

Real GDP is the inflation adjusted nominal GDP and represents various changes in production levels when compared to an established base year and provides a more accurate figure than the nominal GDP. Using the real GDP will provide a more accurate quarter by quarter production comparison for economists. By comparing quarterly Real GDP data, economists will be able to identify if the economy is growing faster or more slowly to the previous quarter or the same quarter in previous years. Real GDP measures the final production output for the United States for the previous quarter; it does not measure sales. For example, when a car dealer builds a car; the final production value of the car is incorporated into the GDP, not the individual parts used to build the car.

Nominal GDP is measured at current market prices, which includes inflation and deflation during a current year. A convenient use of the nominal GDP is for measuring the current economic activity in a country. There are three ways to calculates the nominal GDP; the first technique is the production method, the countries goods and services are added up to derive a nominal figure; the next technique is the expenditure method, this method sums up the spending on all domestic goods and services of the country's citizens; the last technique is the income method, this a process of totaling the income of everyone within the country.

Unemployment rate represents the proportion of a country's citizens willing and capable to work but for some reason are not working. The unemployment rate fluctuates with economy; when the economy is growing, the unemployment rate will decrease and conversely, when the economy is struggling, the unemployment rate will increase. Prior to 1950, the United States Government defined full employment as two percent or less because the two percent represented people who were quitting their jobs just long enough to find another job and a small number of drug addicts and alcoholics. During the course of history, the United States Government slowly changed the definition of full employment to 6.5% unemployment and the