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Inflation, deflation, and unemployment

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1. What is the formal definition of economics?
Economics is the study of how human beings coordinate their wants and desires, given
the decision-making mechanisms, social customs, and political realities of the society.
One of the key words in the definition of the term "economics" is coordination.
2. What is a consideration of economics? What is not?
3. What role does economics play in your personal decisions?
4. What is the difference between real GDP and nominal GDP? Does GDP accurately reflect our nation's productivity? Why or why not?
5. What are the different types of unemployment and how do they affect the economy?
6. What is the formal definition of inflation? What is the formal definition of deflation?
7. What is the historical relationship between inflation and unemployment?
8. Identify a source for economic forecasts of real GDP, the unemployment rate, the inflation rate, and a key interest rate. What do these forecasts imply about the relative strength of the economy over the next two years? How might your organization be impacted by these changes?
9. What is the relationship between the market and aggregate demand and supply curves?
10. What are the advantages and disadvantages of a market economy in comparison with a
command economy?

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Solution Preview

1. The definition you have is good, but could be simplified since you've asked for things in layman's terms. I would say that in very basic terms, economics describes how society coordinates the actions of buying and selling, and all the factors that influence how much is bought and sold.

2. Economics deals with wants, desires, and how they are satisfied. It is the study of mankind's search for welfare in the material sense, and the resulting trade-offs due to limited resources. It concerns the mutually beneficial interactions of the marketplace, which are the underpinnings of all human civilization. However any activities that do not involve money are excluded from the realm of economics. Examples include concern for our fellow man or religious beliefs. It is also difficult to place a monetary value on such environmental issues as the extinction of a species.

3. What role does economics play in your personal decisions?
This answer will vary depending on your circumstances. A good example that probably applies to you is the decision to attend college. This involved a trade-off between going to work full-time and enrolling in college. You weighed the benefits of the higher salary against the cost of tuition and the "opportunity cost" resulting from forgone wages in the present, and decided that going to college was the better choice to maximize your long-term happiness. You may also have been influenced by the current economic slump. It can be better to return to school when jobs are scarce, and re-enter the job market when the economy improves.

4. What is the difference between real GDP and nominal GDP? Does GDP accurately reflect our nation's productivity? Why or why not?

Real GDP is a true reflection of economic output, while nominal GDP has not been adjusted for inflation. For example, if nominal GDP increased 5%, but inflation rose 4%, our real GDP is only 1%. GDP is the best measure we have of economic productivity, but it is not perfect. GDP does not measure the sustainability of growth. A country can over-exploit its resources to temporarily boost its GDP at the expense of its future well-being. It also doesn't include black market activity, which can be considerable. Thus it may underestimate the ...

Solution Summary

Exploration of real vs nominal GDP, different types of employment, inflation and related concepts.