Fundamentals of Macroeconomics

Fundamentals of Macroeconomics

Understanding the fundamentals of macroeconomics will help individuals to have a better perception of what is happening in the economy around them. This paper will have two parts to help these individuals in their understanding. The first part will contain a brief explanation of a few key terms that are widely used. The second part of this paper will discuss how certain economic activities affect government, households, and businesses.

Part One- Key Terms

The following terms will be briefly described to help individuals understand the fundamentals of macroeconomics: Gross domestic product (GDP), Real GDP, Nominal GDP, Unemployment rate, Inflation rate, Interest rate.

Gross domestic product (GDP) - The gross domestic product, also known as GDP, is a term used to describe the market value of all final goods and services produced within a country. The word 'final' is key to understanding the GDP as it means the end product. Each country has their own contributors to the GDP as it describes things that are done within a single country. The GDP measures the growing economical rates by calculating items such as household consumption, net exports, government spending, and business investment spending.

Real GDP - The real GDP is a figure that represents the prices of goods and services within a specific year and shows an adjustment for inflation (or deflation).

Nominal GDP - Nominal GDP is like real GDP but without the adjustment for inflation or deflation.

Unemployment Rate - The unemployment rate is a representative of the number of people who are willing and able to work who are not working. This number includes all types of unemployment (cyclical, structural, and frictional).

Inflation Rate - The inflation rate is a number that identifies the increase of prices for goods and services. It is important to note that this number represents a measurement based on annual figures.

Interest Rate - Expressed as a percentage, the interest rate is a specified amount that a borrower pays to a lender (loans).

Part Two - Economic Activities

Governments, households, and businesses are all affected by the different economic activities that take place in society. The following activities will be used for providing examples on how each affect the three: Buying groceries, Massive layoff of employees, and Decreases in taxes.

Buying Groceries - The purchase of groceries affect households in many ways. The first way involves creating jobs for household members due to business that is created in which more employees are needed. The second way comes when spending needs to be cut back due to a decrease in income of the households. When consumers are spending less money at the store for groceries, the business