Macroeconomics

Fundamentals of Macroeconomics Name: Instructor: Institution: The Gross Domestic Product (GDP) relates to the market prices of a nation’s output in a particular year. This encompasses final goods after adjusting intermediate goods to avoid double counting. However, only those goods and services that result in production account for GDP whereas activities involving income transfer are left out. GDP can also be viewed from an expenditure approach as the aggregate expenditure of consumers, government and investments. The GDP is a vital parameter because it measures the economic growth in a country. The Real GDP is the final output of a country’s economy at constant prices, after taking into consideration inflation. To account for price changes the Real GDP uses a specific base year to compare prices (Mankiw, 2011). Because real GDP is unaffected by prices it is more accurate in measuring changes in production than nominal GDP. Nominal GDP measures the level of GDP using market prices, the relation between the real GDP and nominal GDP is the price deflator which is a percentage ratio between nominal and real GDP (Mankiw, 2011). The unemployment rate is a percentage of people out of work versus the total labor force , individuals must be willing and actively seeking jobs for them to be considered unemployed. Rise in the unemployment rate indicates that an economy is slowing down, and interest rates are inversely related to the unemployment rates. Inflation rate is a percentage of the upward increase in the prices of goods and services over time, the most common being the annual inflation rate. A substantial rise in inflation rate negatively impacts on the purchasing power of consumers (Arnold, 2010). Interest rate is a percentage of the amount paid on borrowed asset, p...