Part 1
Gross Domestic Product (GDP) is composed of consumption of goods and services by the public, investments into the production of these goods and services, the net imports which is accounted for by the difference between what the country imports and what the country exports, and what the government spends. In the diagram shown above, GDP is the summation of all the activities of households, government and business. GDP is measured yearly so to understand if the economy is improving or not, experts (economists) measure GDP as a percentage change from the previous year. The measurement is affected by time since goods and services increase per year, an occurrence called “inflation”. Inflation is persistent and is observed year-to-year. When the price of the goods produced by businesses that is consumed by the government or by households’ increases, the currency (or the value of the money) held by government and households decrease which means they are able to buy less goods and services. This results in a reduction of the ability of households and the government to purchase the amount of goods and services it could a year prior thus reducing economic growth. To adjust for inflation, economists measure “Real” GDP by removing the effect of inflation from the measurement. This results in what is known as a “constant price” measurement, which is more popularly known as Real GDP or GDP that is measured in constant dollar form. The fact that the economy grows despite the removal of any price changes means that there is progress in the country. If the GDP is not measured in constant dollar terms, then it is measured in nominal terms. The Nominal GDP could be misleading because it would report a higher change from the production levels of the previous year because of inflation. Thus Nominal GDP is not a measure that is normally used for economic analysis.
Interest rate is the cost of money that is borrowed. It is a percentage of the amount borrowed and is paid for a pre-determined period which corresponds with the payment of the borrowed money. Interest rates are expressed as percentage per annual (per year). In economics, interest rates are used to help keep the price of goods and services stable. Unemployment rate is a percentage of the labor force that has not found suitable economic employment. The occurrence of inflation and employment in the economy causes policy conflict. For example, as more people get employed (i.e. unemployment is decreasing), it causes an expansion of demand. This expansion in turn causes prices of goods and services to increase thus pushing inflation upward. At a certain point, the gains from increased employment are negated by inflation rate increase. Policy makers must address this demand-pull-inflation-push issue to gain economic benefits from increasing employment. All these macroeconomic factors interplay with each other and influence the performance of any particular country.
There is always a trade-off between progress and environmental sustainability. The issues on whether a country could take in more industrial development versus the potential risks of harming the environment are present and are best managed through policies that seek to find an equitable result for both aspects. This is still under study in many countries because the environmental effects are often long-term in nature and cannot be easily seen. The danger of not being able to address environmental concerns however, is minimized through the use of various measures taken by both public and private sectors. Sometimes a country can become a victim of its own success. In some cases, growing the economy too fast causes the economy to weaken. When growth is experienced, the economy’s ability to purchase goods and services increases. When this growth is at an accelerated pace, the demand accelerates too much causing a shortage in supply which in turn leads to inflation. Again, the overheating economy suffocates growth via runaway inflation.
Part 2
Purchasing groceries is an economic activity that is experienced throughout the entire economy. For one, purchasing groceries mean that businesses that produce and sell them earn a profit. This contributes to their viability. This also means that the producers of these goods earn. The government earns through the receipt of taxes that are levied on goods and services thus the coffers of the government are filled. Private companies are then able to produce goods again that can be sold and if the demand for these goods increases, they can employ other people to produce them. This contributes to jobs and a decrease in the unemployment rate. The government on the other hand, will be able to invest in capital goods to serve the people and to make production better, easier and more efficient for producers. The influx of money on the economy however creates inflation which reduces the consumer’s ability to buy. This whole interactive economic model is best managed by economists and policy makers.
On the other hand, a lay-off of employees adds to the unemployment rate. If these people do not have the capacity to buy then the ability of the economy to be viable is affected. Less demand for goods and services means less revenues for private institutions and the government which leads to less investments in productive assets or in public goods. This is why countries manage employment more than they manage inflation rates. A decrease in taxes reduces the revenues earned by the government but increases the capacity of people to buy. It also makes businesses more attractive because more of the money generated from sales are kept by the business men rather than paid out as a cost to the government. Balancing taxes, unemployment, prices and other macroeconomic factors influence the health and sustainability of countries worldwide.
Works Cited
Beggs, J. (2013). What is Macroeconomics. Retrieved January 21, 2014, from http://economics.about.com/cs/studentresources/f/macroeconomics.htm
Britannica, E. (n.d.). Monetary Policy. Retrieved January 14, 2014, from http://global.britannica.com/EBchecked/topic/389158/monetary-policy
