Fundamentals of Macroeconomics

Fundamentals of Macroeconomics Lisa Rasch ECO/372 June 18th, 2012 Sigmund Karczewski Fundamental of Macroeconomics Part 1 * Gross Domestic Product (GDP)- GDP is the value of all goods and services that have been produced in a country within a period of time. * Real GDP- Real GDP refers to the value of all goods and services that has been adjusted for inflation or deflation. * Nominal GDP- Nominal GDP refers to the value of all goods and services that has not been adjusted for inflation or deflation. Unemployment Rate- Unemployment rate refers to the percentage of people in a country who want to work and are able to work but cannot find jobs. * Inflation Rate- Inflation rate is the rate of price increases within a period of time. * Interest Rate- An interest rate is the amount of money a person pays in order to borrow money. Part 2 Purchasing Groceries The purchasing of groceries has an effect on the United States’ economy and its three sectors; businesses, households, and government. Purchasing groceries effects households and businesses the most however government is also effected.

Government is responsible for creating the rules and regulations surrounding the production of the groceries (food safety laws, etc. ). Businesses then produce the groceries within the government regulations increasing value for that business. After the businesses have produced the goods, the goods are then purchased by other businesses to be sold to consumers. Generally, a grocery store (a business) will purchase the groceries from vendors (other businesses), increasing the value of their business; that inventory is then sold to households (consumers).

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Once the goods are sold to consumers, the value of the goods is then transferred to the consumers. Massive Layoffs of Employees A massive layoff of employees also has an effect on the three sectors of the U. S. economy. A massive layoff affects households the most although the other two sectors are also affected. Households suffer a loss in income as a result of a layoff and the loss of income will translate to a reduction of purchasing power for the household.

The reduced purchasing power will affect businesses because the households that suffered layoffs will not have the money to purchase goods or services from businesses. The government will also see a reduction in revenue from the layoffs because the households will pay less money in income taxes. The government will also be affected by the lack of sales taxes from purchasing goods and services and the reduction in taxes being paid by the businesses; the less sales the business reports the lower the taxes they owe to the government. Still, the hardest hit sector for massive layoffs will be the households.

The reduced income for households will have a trickledown effect on the rest of the economy because “households are the most powerful economic institution” (Colander, 2010). Decrease in Taxes A decrease in taxes will have an effect on the three sectors of the U. S. economy as well. The sector that will be affected the most by a decrease in taxes will be the government. A decrease in taxes will reduce the amount of revenue collected by the government which will reduce the amount of goods and services the government is able to provide for households and businesses.

The government collects taxes in order to have the funds to pay for services such as unemployment insurance and the welfare system as well as infrastructure such as roads and street lights. A decrease in taxes will have a positive effect on household income however; the reduction in government infrastructure and services might have a negative effect on households. If the government does not have the money to pay for infrastructure it could result in households having to pay more money to maintain their property; pot holes not being repaired quickly could cause higher car maintenance costs.

Businesses will also be affected by a decrease in taxes. Lower taxes will mean businesses will have more money to spend on increasing their labor force or making improvements to their businesses. The increased revenue for businesses and households will put more money back into the economy. The decrease in taxes will decrease revenue for the government while increasing revenue for households and businesses. Reference Colander, D. C. (2010). Macroeconomics (8th ed. ). Boston, MA: McGraw-Hill/Irwin.