Macroeconomics: Term Definition Paper
Gross Domestic Product [GDP]
Gross Domestic Product, also known as GDP, serves as one of the tools of economists in determining or gauging the performance as well as the size of a given economy (Investopedia.com, 2007). GDP is defined as the totality of the finals goods and services in the market that were produced within a given country at a specified period. Another definition would be, GDP is the sum of all final goods’ or services’ value added at every stage of production produced in a certain economy at a specified period as well as it is given a monetary value. Mathematically, GDP defined as the sum of domestic consumption, gross investment, government spending as well as the trade balance or the difference between the net exports and net imports. GDP is very much different with the Net Domestic Product. In GDP, the depreciation of capital stock is not included in the calculation of economy’s performance whereas Net Domestic Product accounts the depreciation of capital stocks. In other words, Net Domestic Product would be the best economic indicator in determining the “real” economic performance of a certain country.
Real Gross Domestic Product [Real GDP]
Gross Domestic Product has two types namely: Nominal GDP and Real GDP. As for the scope of this paper, only Real GDP will be discussed. Real GDP is basically the GDP adjusted for price changes and inflation. Another definition of real GDP would be, it measure the output of final goods and services produced and accounting the incomes earned when prices are said to be constant in a given country at a certain time frame. The inclusion of price changes and inflation makes Real GDP and Nominal GDP different to one another. To compute for real GDP:
Real GDP = [(Nominal GDP) / (GDP Deflator)] * 100
One possible definition of unemployment rate would be it represents the percentage of unemployed persons on the total labor force of a given country. In other words, unemployment rate determines the level of how fast the number of unemployed persons in a certain country increase or decrease based on the total labor force. Unemployed persons includes those people who are already 16 years old and above that had no employment during the reference week or those people who are available for work, excluding those who are temporarily ill and are making efforts to find a job within the reference period. Even those persons who were laid off on their work and currently waiting to be recalled to job are also included in unemployed pool of individuals. Mathematically, unemployment rate is defined as the quotient of total unemployed workers and the total labor force of a given country multiply by 100%.
Unemployment Rate = [(unemployed workers / total labor force) * 100
Inflation rate is defined as a tool for measuring inflation, and the rate of increase of the average price of consumer goods and services purchased by households, also known as the consumer price index. Another definition of inflation rate would be the rate of decrease of purchasing power of money which denotes the amount of value of goods and services compared to the amount paid. Mathematically, inflation rate is defined as difference between the current average price level and the price level a year ago divided by the price level a year ago multiplied by 100%.
Inflation Rate = [(P0 – P-1) / P-1] * 100
where: P0 is the current average price level
P-1 is the average price level a year ago
Interest rate is technically defined as the rate of raise of bank deposits in a given economy over time. Moreover, interest rate can also be considered as the payment or rent on borrowed capital in a form of either money, stocks or any currency holder that can store value. Interest rate can also be treated as the price of money subject to the demand and supply of the currency in the money market, therefore, making it be easily influenced by market distortions such as inflation and currency exchange rates. Interest rate the accounted inflation is known as real interest rate while nominal interest rate would be the price before the adjustment to inflation. Furthermore, another definition of interest rate would be the opportunity cost that a lender will forgo for other future investments for lending money to a borrower.
Circular Flow Diagram
Under the circular flow diagram, the economy I divided into two sectors namely firm and household which interact for the attainment of equilibrium condition in the economy. Private firms produce products for exports and domestic consumption which will move towards the households as the latter buys goods and services in the market and towards the government in a form of tax earnings. Households on the other hand, will provide labor as a factor of production in order to earn money to be able to buy the goods that they will need for survival on the private firms. Moreover, the government will use those tax collections for the provision of infrastructures such as bridge and buildings that can improve the business operation of the private firms through lowering down the production costs and increasing the efficiency of transportation facilities and the cycle goes on, see Appendix.
As for the case of Wal-Mart, consumer price index would truly matter on the operation of the business since inflation might weaken their sales volume due since consumers would no longer prefer their products and will search for other retail stores that can provide cheaper products in the market. By monitoring the CPI of the economy, Wal-Mart can easily make necessary adjustments on their inventory or other precautionary measures to avoid the negative impacts of inflation on their price competitiveness.
Circular Flow Diagram
Investopedia.com (2007). What is GDP and Why is it so Important. Retrieved February 21, 2008, from http://www.investopedia.com/ask/answers/199.asp