Fundamentals of Macroeconomics
As one begins to understand how the economic world around him is affected by basic events, one must gain a basic knowledge of the basic design of the economy for maximum effectiveness. To facilitate this learning process, this paper will describe some basic terms that are in most discussions surrounding economics. Once there is an understanding of the terms, the description will change to several scenarios, and how the result of a seemingly innocuous event has a ripple effect throughout the economy, affecting households, businesses, and government.
There are a few very basic terms and concepts that one must understand when embarking ...view middle of the document...
The price of the items in the basket will provide the indication on the rate for the period covered.
The percentage paid for borrowing money, or other financial asset.
It is important to understand how basic economic activities have an impact on various segments of our society. Colander (2010) points out that the U.S. economy can be broken up into three main sections of businesses, households, and Government. Moreover, each of the three sections have an interconnection. In this section, follow the flow of resources from one entity to another and understand how these activities can affect businesses, households, and the government. An easy way to understand the interrelation is to know that there is a circular flow when discussing the aggregate economy (Colander, 2010).
Purchasing of groceries
When one purchases a gallon of milk at the grocery store, there is a chain reaction of subsequent events that directly affect the economy. Initially, the grocery store now has received cash for the purchase, and not only does it pay for the gallon of milk at cost, but it has made a profit in which it pays taxes, the salaries of the store employees, the overhead of the store, and has some profit in which can be reinvested into the business or paid as a dividend to the stockholder. Because the manufacturer of the milk has received payment for the sold gallon of milk, he can now pay for the raw materials received from the dairy farmer. The manufacturer will also pay the salaries of the employees, overhead of the manufacturing facility, required taxes, and have some money left over to reinvest or pay dividends to shareholders. In a similar manner, the dairy farmer receives cash for the milk sold and used the monies received to make the necessary payments for his business. The government benefits from the sale of the milk because it receives some of the taxes. The grocery company, milk manufacturer, and dairy farmer will all pay corporate taxes to the federal and state government as required. This money will fund spending as appropriated. The household receives the gallon of milk. Because of that purchase, the individual will now have to go to work tomorrow to earn the wages that will replenish the cash available for spending. This is consumer spending. This keeps the equation in balance. When examining the GDP, this purchase of a gallon of milk has made a slight change in the number. If one assumes that there are no other changes other than the purchase of milk, which will contribute to the increase in the consumption portion of the GDP equation, which is
“GDP = Consumption + Investment + Government Spending + Net Exports” (Colander, 2010, p. 184)
The other items in the grocery cart will have similar results in their respective industries, and all have the same net increase to GDP.
Massive Layoff of Employees
When a company makes the decision to institute a massive layoff, things have...