ECO 372 Week 2 Individual Fundamentals of Macroeconomics Paper
ECO 372 Week 2 Individual Fundamentals of Macroeconomics Paper
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Running head: Fundamentals of Macroeconomics 1 Fundamentals of Macroeconomics Week 2 Assignment ECO/372 Fundamentals of Macroeconomics 2 Macro Economics is a study which is concerned with the economy as a whole and the level of total output which is also referred to as national income is a very important variable in any economy. National income measures the value of an output produced in an economy over a period of time and the policy makers should be aware of the level of economic activity taking place within the country on behalf of the nationals. One of the most important objectives of the government is to increase the level of the rate of economic growth which is possible only be measuring the national income. The main uses of the national income statistics are: 1. It shows the current allocation of resources, 2. It helps the government in economic planning, 3. It helps measures the country’s standard of living, and 4. It helps in the comparison of the living standard between different countries. There are some important concepts of National Income such as Gross Domestic Product, Gross National product, net National product and The GDP per capita. Gross domestic product: “GDP is the total value of all output produced using resources located within the economy over a given period of time”. It refers to the market value of all final goods and services produced within a country in a given period (O'Sullivan, Arthur). GDP measures the annual value of all economic activity taking place within the economy and the GDP measures are on a value added basis in order to avoid the problem of double counting. Fundamentals of Macroeconomics 3 There are three ways of calculating the GDP but the results of all the three methods should be the same. They are: The Output Method. The Income Method. The Expenditure Method. Nominal GDP: Also known as the money GDP is measured in terms of the prices operating in the year in which the output is produced. it is sometimes referred to as GDP at market prices. It can give a wrong impression about the performance of the economy, because of the changes in the value of money which depends on the price level, which is subject to changes. Normally the Nominal GDP converted into Real GDp which is a measure of adjustment for inflation is used to calculate the National performance. Real GDP therefore is: money GDP/ the price index of the current year X Price index of the base year or money GDP/ GDP deflator of the current year X Price index of the base year (HM Treasury, Background information on GDP and GDP deflator). Unemployment rate: Employment is the total number of people with a job which includes the employees, businessmen and self employed people. The number employed may change over time due to many factors. While unemployment refers to those people who have registered, able, available and willing to work at the going wage rate at any suitable job but cannot find employment. Unemployment is measured at a point of time and the level of unemployment changes over time. Fundamentals of Macroeconomics 4 The number unemployed refers to the number of people of working age, who are without job but are available for work at the current wage rates. While the rate of unemployment refers to those working age, who are without job, but are available for work at current wage rates is expressed as percentage of the total labor force. Unemployment Rate = Unemployed X 100 Labor Force Inflation Rate: Inflation is defined as the persistent or sustained rise in general price level. It is the change in the average prices in an economy over a given period of time. The price level is measured in the form of index. For example, if the price index is 100 today and 110 in the next year, then the rate of inflation would be 10%. In economics, the “inflation rate is a measure of inflation, the rate of increase of a price index and it is the percentage rate of change in price level over time” (Sullivan, Arthur; Steven M. Sheffrin (2003). It can be calculated as: Inflation rate = P0 – P 1 X 100 P1 Interest rate: An interest rate is the rate at which the borrower pays interest for the use of the lender’s money. For instance a borrower uses the money belonging to a lender in his business and in return he pays interest at a predetermined rate of interest for deferring the use of funds and Fundamentals of Macroeconomics 5 instead lending it to the borrower. Interest rates are normally expressed as a percentage of the principal for a period of one year (Mankiw, N. Gregory (20090418). The interest rates targets are a very important tool in the monetary policy and are considered as vital in the calculation and dealing with the variables like investment, inflation and unemployment. They are a very crucial part of macro economics. They are calculated as: r = 1 + i 1 1+ p The aforesaid economic variables are very important tools of Macro Economics and are used in the calculation of the rate of economic activities and economic growth in an economy over a period of time. Purchasing groceries is an activity which involves purchase and sale at a price level. It creates demand for the groceries at a price which covers the cost of production including wages. If we take a two sector model of economy, it has the Household and the business. The household owns the wealth of nation including land, labor, capital used in the production of goods and services, while the business or the firms produce goods and services by hiring the factors owned by the households. The households receive payments for hiring their factors, which they spend on the purchase of groceries from the firms. This generates output which contributes to the GDP, as the additional output adds to the total output in the current year depending on the withdrawals and injections into the economy. When the economy faces a massive lay off of employees, it directly affects the employment and income, which reduces the aggregate demand bringing down the price level discouraging further investment in business. This situation deteriorates the production adversely affecting the GDP in Fundamentals of Macroeconomics 6 that particular year. This condition continues to prevail unless remedial measures in terms of monetary and fiscal policies are taken. When the government decreases the taxation rate, it increases the consumption increasing the demand and price, which induces the investors to invest more bringing up the level of economic activities. Employment will also go up raising the income level, which would further increase the aggregate demand. A decrease in taxation therefore causes a rise in the aggregate demand which would increase the employment, income and other economic activities in an economy. If it exceeds the limit it may also result in inflation. Fundamentals of Macroeconomics 7 Reference: World Bank, Statistical Manual >> National Accounts >> GDP–final output, retrieved January 2012. "User's guide: Background information on GDP and GDP deflator". HM Treasury. http://www.hmtreasury.gov.uk/data_gdp_backgd.htm. "Measuring the Economy: A Primer on GDP and the National Income and Product Accounts" (PDF). Bureau of Economic Analysis. http://www.bea.gov/national/pdf/nipa_primer.pdf. French President seeks alternatives to GDP, The Guardian European Parliament, Policy Department Economic and Scientific Policy: Beyond GDP Study Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 340. ISBN 0130630853. http://www.pearsonschool.com/index.cfm? locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&P MDbProgramId=12881&level=4 Definition of interest rate from Investorwords.com
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