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Macroeconomics: GDP, Unemployment, Inflation, and Circular Flow

Prepare a 700 word paper in which you define the following terms:
a. Gross Domestic Product (GDP)
b. Real GDP
c. Unemployment rate
d. Inflation rate
e. Interest rate
In your paper, explain how the circular flow diagram illustrates the interaction of households, government, and business. Also, describe how current economic conditions are effecting your organization or one which you are familiar. Identify the most important economic indicator affecting your organization and explain why.

Solution Preview

a) GDP is the value of all output in a given year. It is the Price x Quantity for each item produced so if in your economy you produce bicycles and oranges where prices are $5 and $1 respectively and quantities sold that year are 10 and 100 respectively you have GDP = P1*Q1 + P2*Q2 = 5(10) + 1(100) = 150

b) Real GDP adjusts for changes in the price level over time by assigning a base period. So,
RealGDP(current year) =NominalGDP(current year) / GDPdeflator * 100

The GDP deflator is 100 in the base year so when you calculate RealGDP in the base year it will equal NominalGDP for that year. Suppose NominalGDP is 50,000,000

RealGDP = 50,000,000 / 100 *100 = 50,000,000

Now suppose that over a five year period prices rose by 10%. Your deflator would be 110 so...

RealGDP = 50,000,000 / 110 *100 = 45,454,545.45

this value is lower since coverting into Real dollars deflates your nominalGDP

c) The unemployment rate is simply ...

Solution Summary

The following solution provides an overview to several key macroeconomic concepts. First, is an overview of economic output as measured by GDP and the process by which Nominal GDP is adjusted to Real GDP. Next, is a discussion of the labor force and how we define unemployment. Then the inflation rate and interest rates are discussed. The overview continues with a discussion of the circular flow model and concludes with a discussion of recent economic conditions and how fiscal and monetary policies have been implemented to fine tune the sluggish economy. This solution is 633 words.

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