Individual Fundamentals of Macroeconomics Paper

Part 1 ?         Gross domestic product (GDP) – GDP is the total market value of all final services and goods produced in a given year in a given country. ?         Real GDP – Real GDP is the result of the production activity within a given country at a specific years prices. If one compares two or more periods of time using the same year’s prices for goods and services then the result is a purchasing power comparison as seen over time. This happens because the inflation effects have been mitigated by using constant prices.          Nominal GDP – Nominal GDP is simply GDP that has not been adjusted for inflation. Nominal GDP does not reflect purchasing power but does show how an economy has expanded and contracted in dollars. ?         Unemployment rate – The most basic definition of an unemployment rate is those people who are unemployed but are actively seeking work and willing to work. It is typically expressed in the form of a percentage. ?         Inflation rate – inflation is usually expressed in an annual percentage and is the price increase for goods and services.          Interest rate – An interest rate is the percentage of the principal funds that is charged and paid for the use of money. It is expressed as an annual percentage rate (APR) for loans and annual percentage yield (APY) for interest earned. Whether one is experiencing a decrease in their taxes, is part of a massive layoff of employees, or is simply purchasing groceries, there is a resource flow from one entity to another and back again. Those entities cover government, businesses, and households.

How those resources ebb and flow will differ with each situation and have an impact in a “trickle-down” effect from the government to businesses and finally to households. Decrease in Taxes When the Government decides to reduce taxes, the tax typically assumed to see the reduction is the income tax. “According to the Internal Revenue Service (IRS), approximately 43% of tax revenues are generated through this tax. Personal income taxes are levied against income, interest, dividends and capital gains, with higher earners generally paying higher tax rates. (Investopedia, 2012) When a tax reduction occurs, the government will collect less taxes which reduces the amount of monies available for entitlement programs. Households can be affected in a couple of different ways. If a household is a higher wage earning household then less taxes can result in more discretionary income to spend at businesses who offer services the household members wish to utilize. If the household is lower income the decrease in taxes will increase their income but will adversely affect any entitlement programs in which they may be enrolled.

For businesses, the reduction in income tax will affect their businesses per the consumer impact. If there is more discretionary income then more money is available to spend on their goods or services. If there is less discretionary income, then of course, the opposite would be true. Massive Layoff of Employees From a government standpoint and governmental employees, when there is a massive layoff of governmental employees, historically, there has not been more than a ripple in the unemployment rate overall.

A 1995 survey and a subsequent 1999 follow up to municipalities in Illinois found that the average amount of people still unemployed after a governmental layoff was only 3. 8%. (Reason Foundation, 2012) From a governmental employee standpoint, there is not a large scale economic impact which means that the majority of affected governmental workers will still have income to spend at businesses and for their household needs. When private sector businesses have a massive layoff occur, they are required by Federal law to notify the affected employees 60 days in advance.

The employees have an opportunity to look for other jobs in that timeframe, however, resources will begin to be held back by the households in the case of long term unemployment which will in turn cause business who offer the good and services to the affected families to experience a decrease in sales. Purchasing of Groceries Groceries are an inelastic product. People will purchase food regardless of the price because they need to eat.

When a household purchases groceries, and pays a higher price for them in one grocery store versus another, the business which earned the opportunity for the sale will benefit. The government does not benefit from a tax standpoint on non-processed foods. Processed foods, however, are taxable; which is a benefit to the government. The Government may also pay a producer not to produce a food so as to stabilize the market. A couple of examples of this situation are in the commodities of rice and wheat.

Producers are paid not to plant as much so the market price of the end product is stabilized. In fact, those producers are paid not to produce so there is no loss of income to those households. Conclusion Whether one is experiencing a decrease in their income taxes, is part of a massive layoff of employees or is simply purchasing groceries, there is a resource flow from government, businesses, and households. Resource flow also has an ebb phase. The entire cycle is driven by an almost an amazing number of determinants.

These determinants all have an effect on the final outcome as to where and how the Government, businesses, and households use their finite resources. References Richard Coultier, Do Tax Cuts Stimulate the Economy? (June 23, 2010) Retrieved on January 23, 2012 from http://www. investopedia. com/articles/07/tax_cuts. asp#axzz1kIPnIgcg The Reason Foundation, Privatization and Layoffs (March 1, 2001) Retrieved on January 23, 2012 from http://reason. org/news/show/privatization-and-layoffs