Essay Preview: Economic Fundamentals
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Its very important to understand economics in the business world. Economics is a social science that deals with the description and analysis of the production, distribution, and consumption of goods and services (Merriam-Webster.com, 2013). When dealing with economics one has to understand Gross Domestic Product, real GDP, nominal GDP, unemployment rate, inflation rate and interest rate. This paper will describe and consider how these terms factor into economics.
The total market value of all final goods and services produced in an economy in a yearly period is called the gross domestic product or GDP. In economics, this is probably the most used measure of how well an economy is doing. This measurement is basically all production in the country and services provided for monetary gain. This measurement consists of millions of different services and products in the economy and it is usually divided into four categories known as consumption, investment, government spending, and net exports. If these produce any monetary funds that can be tracked then they are counted in the measurement. When an economist looks at GDP they know that it represents a flow not a stock and referes to the market value of final output, not total transactions in an economy. Economist also recognize that GDP does not reflect Illegal drug sales, under-the-counter sales of goods to avoid income and sales taxes, work performed and paid for in cash to avoid income tax, nonreported sales, and prostitution which are all market activities, but are not reported. This is one major problem that GDP faces when producing its figures yearly (Colander, 2010).
GDP also faces two measurements known as real GDP and nominal GDP. Real GDP is the market value of final goods and services produced in an economy within a given year, this means that all goods and services are measured and they include any inflation rate to give the most current monetary value. So when any citizen produces and sells goods they earn money and if the economy is increasing this means that the income or money they earn will increase from previous years (Colander, 2010).
When one discusses nominal GDP they are discussing the GDP calculated at existing prices or proces that have not included inflation in the measurement. This is also called the current dollar GDP. This can actually be confusing if inflation is not factored in as it will give a higher measurment in GDP and not reflect actual numbers (Colander, 2010).
When one is talking about inflation its important to understand what it means.
Inflation is a continual rise in the price level. To be put simply its when the value of money either rises or falls causing products or services to cost more to consumers in a countrys economy. For many governments the fear of inflation will prevent expansion of the economy and the ability to reduce unemployment. It will also prevent the ability of policies put in play from lowering interest rates and the continuation of rises in the price level. Governments will see two types of inflation: expected and unexpected. This simply means people either expect inflation to occur or when it does its a surprise to them. Most wages and prices are set for periods that run from two months to up to three years, so when inflation occurs within these periods redistribution of income will occur for those who cant or dont raise prices to reflect the inflation and benefit those who do raise prices. When this happens this will often create feelings of injustice about the economy. Economists measure inflation by subtracting productivity growth from nominal wage increase. Inflation is normally accepted in government as long as it stays minimal, in the U.S. this minimal measurment is considered to be between 2 ½ to 3 percent (Colander, 2010).
Inflation has a big impact on the interest rate or the prices that are charged or paid for the use of a financial asset. This simply means an amount that a lender will charge on the principle amount of money borrowed.These interest rates can be expressed as