Part 1
Gross Domestic Product (GDP)
GDP is one of the economic indicators used by economists
to assess the economic status of an economy. It represents the total value of
production realized by producers residing in an economy (Tabuga, 2006). In
essence, the GDP is the total value of goods and services produced within an
economy. An understanding the concept of economic territory is a prerequisite
to understanding the very concept of GDP. Thus, there are places within the U.S
geographic territory but outside its economic territory. Such places include
foreign embassies located in the country.
There are two possible ways of measuring the GDP
(Kurihara, 2012). According to the production approach, industrial origin is
the basis of measurement. The approach divides the domestic economy in a number
of sectors before summing up the value added contribution of those sectors to
the whole domestic economy. Likely sectors of an economy could include
agriculture, industry and services. On its part, the expenditure approach adds
personal expenditures of households, government consumption, investments and
exports less imports.
Real GDP
A change in the GDP can be the result of either actual
changes in output of products or services or changes in the prices at which
those goods and services are selling (Baumol & Blinder, 2010). Real GDP is
the concept through which economists separate changes in output from changes in
prices. It is measured by pricing current output at the prices that existed at
some time in the past. That year in the past is what is called base year.
Nominal GDP
Unlike real GDP, the measurement of nominal GDP does not
make a distinction between changes in prices or changes in output. It is
measured by pricing current output at current prices.
Unemployment rate
This is the number of unemployed people measured as a
proportion of the labor force (Baumol & Blinder, 2010). Those considered to
be unemployed must be individuals who are ready to work and are actually
actively looking for work but cannot find work. Other people who may not be
working but are not actively looking for work are considered to be outside the
labor force.
Inflation rate
As the name suggests, inflation rate is a measure of the
rise in the average prices of all goods and services in an economy. Inflation
rate is measured by the determination of the percentage change in the prices of
a fixed set of goods and services from one period to the next.
Interest rate
The interest rate is the cost that lenders of capital
charge to their borrowers. It is, therefore, impossible to talk of an interest
rate as there is no single rate in the economy. Different rates exist for
different arrangements.
Part 2
Purchasing of Groceries
Government
As people purchase groceries, the government collects
more taxes in grocery items to which the various taxes are applicable. For
instance, there could be sales taxes on all sales by businesses. Some groceries
may also attract value added taxes. Alternatively, the purchase of groceries may
also lead to the government spending more money in situations where there is
government support for those doing the purchase.
Households
By purchasing groceries, households engage in consumer
spending. This in turn takes money away from these households towards the
businesses that sell those groceries.
Businesses
Businesses operating in the groceries segment experience
increased business activity due to more purchases. Depending whether businesses
expect grocery purchases to continue for some long time, many of them may spend
may decide to hire more people to cater for the increased business. In
addition, the businesses expecting the purchase of groceries to continue for
long will also invest in technology.
Flow of resources
Money in the form of prices paid for groceries goes to
the businesses. The government also receives a portion of that money in the
form of taxes. Businesses also pay corporation taxes to the government from
profits emanating from these purchases.
Massive layoff of employees
Government
Massive layoffs are an indicator of increasing
unemployment. The government, in countries with safety nets, is forced to spend
more in unemployment insurance. In addition, the government also losses money
as fewer people are now able to pay income tax.
Households
Massive layoffs reduce the disposable incomes of
households whose members are affected by the layoffs. With a reduction in
disposable income, these households will also reduce their savings as much of
their income is now directed to consumption expenditure. Many households in
countries that provide social safety nets rely mainly on these programs in
times of massive layoffs.
Businesses
On their part, businesses must scale down productivity
resulting from massive layoffs. The relationship between layoffs and
productivity is not a very straightforward one as it could be the case that low
productivity is the result of some other factors or it is the cause of those
factors.
Flow of resources
Money spent on social safety net programs flows from the
government to the households. This in turn flows from the households to the
businesses as households use the money in their various expenditures.
Decrease in taxes
Government
A decrease in taxes can either decrease or increase the
tax revenue to the government. In situations where tax decreases incentivizes
businesses to scale up productivity, the government is likely to get more in
total tax revenues. Otherwise, the total tax revenue may decrease.
Households
With lower taxes, households are left with more
disposable incomes. Depending on their respective circumstances, they may
increase either their savings or expenditure.
Businesses
They are likely to scale up productivity by investing in
new equipment and hiring more people which ultimately leads to more
profitability.
Flow of resources
Total tax revenues will flows from both households and
businesses to the government. Households also spend more towards goods and
services obtained from businesses.
References
Baumol,W.J., & Blinder,A.S. (2010).Macroeconomics: Principles and Policies,
Eleventh Edition.Mason,OH:South-Western
Cengage.
Kurihara,K.K. (2012).National
Income and Economic Growth. New York: Routledge.
Tabuga, A.D. (2006).The GNP and GDP: Understanding their
Scope and Measurement. Economic Issue of the Day, VI (6), 1-3.
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