Macroeconomics: Determination of GDP

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Every country produces various goods and services. It is the market value of these final goods and services that is referred to as gross domestic product (GDP). GDP is therefore one of the indicators of a country’s economic performance. Three approaches are used in the determination of GDP.

They include: income approach, expenditure approach, and the product approach. GDP can be referred to as real or nominal GDP (Colander, 2010). When GDP is calculated without putting into consideration inflation factor, then it is referred to as nominal GDP. Adjusting the GDP by taking into consideration the inflation factor, real GDP is arrived at. As a result of the inflation factor, nominal GDP appears higher than real GDP.

Unemployment is an indicator of a falling economy. At any given period of time, any economy has a number of people who are unemployed and are actively seeking a paid job. This percentage of the workforce is what is known as unemployment rate. A rising unemployment rate is a cause for alarm because it signifies no promising signs for the economy. The effect is that interest rates decrease as well as inflation rate.

A general rise in the average price of goods and services in an economy is referred to as inflation. It is measured as a percentage. A high rate of inflation is an indicator that the economy is growing. There is an increase in GDP and a decrease in unemployment rate. On the other hand, a low rate of inflation signifies an increase in unemployment rate and a poor performing economy. Price increases lead to weakening of currency purchasing power. This means that a unit of currency buys fewer goods.

In an effort to balance money supply and unemployment rate, interest rates have to be adjusted. Thus interest rate refers to that percentage levied by lenders on the principal amount borrowed. Low interest rates encourage investment as well as consumption.

However, very low interest rates may lead to an economic bubble (Colander, 2010). This is an overwhelming investment in the security markets and real estate markets. Investors are discouraged by very high interest rates as this means they will have to pay more for their borrowed money. Consumers too are not excited about spending their money.

Purchase of groceries could be seen as a measure to increase savings by households. This is due to the fact that other foodstuffs of luxurious nature are more expensive. In the long-ran, no money is saved due to the fact that households’ money is distributed across more expensive to less expensive food commodities.

Businesses inclined to produce and manufacture groceries reap big therefore experiencing some growth. Employment opportunities in these businesses increase as compared to other businesses in the economy. Other forms of food industries suffer revenue losses. The government gain more tax revenue from the grocery industry as opposed to other food industries.

Massive layoffs of employees raise the unemployment rate. As a result, government revenue goes down due to the fact that the amount of income tax has reduced. Households suffer layoffs due to the increased number of dependants. Those who are still in employment have a burden of supporting directly or indirectly those who have been laid off.

The disposable income thus reduces when the number of social crimes increases which has adverse effects to the households, businesses and also the government (Branson, 1979). For businesses, the level of production goes down. The few employees left are not enough to produce to capacity. It is possible that they get overworked. This slows economic growth which is reflected in the gross domestic product.

A reduction in taxes has certain consequences on businesses as well as households and the government in diverse ways. It is one of the fiscal policies that the government has power over. The government decides whether to reduce or increase tax (Palacios, 2008). A reduction in taxes results to decreased government revenue.

This means that the government has to finance its budget deficit through other means. Households have increased disposable income which they direct to businesses. Tax reduction is seen as a business incentive and as such, it triggers economic growth.

In conclusion, it is important to note that every activity in the economy has its effects. They may be desirable or undesirable. The gross domestic product, nominal or real, unemployment rate, inflation rate and interest rates are good indicators of how good or bad the economy is performing.

Purchase of groceries, tax reduction and layoff of employees all have their effects which are reflected through the impact caused on the various players in the economy. These include the government, businesses and households. What may seem good to one player may not necessarily be good to other players.

References

Branson, H.W. ( 1979). Macroeconomic Theory and Policy. New York: Harper and Row.

Colander, C.D. (2010). Fundamentals of Macroeconomics (8^th ed.). New York: McGraw Hill.

Palacios, M. & Harischandra, K. (2008). The Impact of Tax on Economic Behaviour.

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Macroeconomics: Determination of GDP

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