Term Definition Paper - Essay Example

Running Head: [short [institute of affiliation] Gross Domestic Product (GDP) As true for any given nation, there are a number of desires that wish to be fulfilled with the given amount of resources of that nation. These desires, when backed up with purchasing power transform into demands. When these demands are satisfied by products and services firms produce, the final output is measured as the gross domestic product. GDP or gross domestic product is the level of final output produced within an economy. These outputs are assigned with prices according to their market values, thus gross domestic product is a monetary figure. Real GDP While gross domestic product is the measure of final outputs produced in an economy, represented by the prices that are assigned according to their market values, these prices tend to change over time. As the level of prices increase, an increase in GDP is not attributable to increase in the level of final outputs. Thus, real GDP measures the level of final outputs, as adjusted according to the inflation rate. In measuring real GDP, prices are usually indexed by using a level of price for a current year. By using such price level as benchmark, the increase in GDP can be measured in real increase in the level of final outputs produced and not by the increase in the price level only. Unemployment rate Unemployment rate is the rate of the level of the resources, especially human resource, which remain idle, not employed, and thus not contributing to the productivity of the economy. Unemployment rate usually comes in three types: frictional unemployment, structural unemployment and cyclical unemployment. In frictional unemployment, people become idle and unemployed as they quit their jobs and start to look for another job in return. Because they are not contributing to creation of an output in order to satisfy some wants to the economy, they are considered idle, thus unemployed resource. This also happens when there are fewer jobs to accommodate the number of job-seekers. The job-seekers who do not get qualified for the jobs that are available are considered unemployed resources; in this situation, the unemployment is the result of the structure of the job market, thus it is called structural unemployment. The third type of unemployment is called cyclical unemployment. This happens when the economy experiences recession due to cyclical business downturns. When this happens, the overall demand for outputs is low, which hurts the profitability of the firms. Due to this, firms resort into layoffs which put people out of their jobs, and become idle resources for the given period of time. Inflation rate Inflation rate is the rate of change in the overall price level in the economy. As final goods and outputs in the economy are assigned with prices according to their market values, these prices are arbitrary and tend to increase year after year. The increase is made to give way to producers in order for them to recover their costs of production. Even when the level of output remains the same, inflation increases gross domestic output by the increase in prices. The inflation rate is determined by the interaction of the aggregate demand—the overall level of demand in the economy, and the aggregate supply—the overall level of output producers are willing to supply in order to meet these demands. An increase or upward shift in the aggregate demand at the same level of aggregate supply causes an increase in inflation rate—also known as demand-pull inflation. The increase in the costs of production, and other factors which can cause a downward shift in the aggregate supply also produces inflation. This is also known as cost-push inflation. In cases where the overall level of price decreases instead of increase, a deflation is said to be happening. Hyperinflation, on the other hand, is a term used to describe a very rapid increase in the level of prices. Interest rate There is a cost to keeping money, and that is interest rate. The interest rate is the opportunity cost of keeping money than investing the money in some other means such as certificate of deposits that are offered by the Federal Reserve. Because interest rate represents an opportunity cost, it represents the price a keeper requires when the money is lent to another person or entity. When someone borrows money, the interest rate is the price the person will have to pay, in the form of interest payments along with the full repayment of the principal/ The circular flow diagram The circular flow diagram represents the interaction of household, business and governments in terms of two markets—the market for products and services, and the market for factors of production. On one side of the diagram, the market for the products and services, demand comes from consumers and households. The supply comes from firms who produce these goods. As the firms grow and face a need to supply more products in the market, they go into the factors market to purchase inputs, or factors of production, or land, labor and capital. Firms avail of these factors through the factor markets, where payment comes in the form of wages to employees, rents, and interest payments. These payments come back to households and final consumers. Government comes into picture in the form of taxes that are levied on organizations and individuals. For the sake of collective services that are offered in the public as a whole, taxes pay for these services such as roads, schools and other public infrastructure. The government also avail factors of production from both businesses and individuals or households. Effects of current economic situation to an organization The current economic situation affects my organization in the form of lower demands for output because of the financial crunch. While the effect is on the national scale, if not on the global scale, local organizations can feel the effect through decrease in sales due to curbing down on consumption. At times like these when there is recession, organizations face a challenge of coming up with ways in order to boost demand, despite the developing mentality of curbing down on consumption. Most important economic indicator to affect the organization The most important economic indicator which affects my organization is the growing inflation, which is of the cost-push variety that a lot of other countries in the whole world also experience. The cost-push inflation makes the prices of inputs higher, therefore squeezes the profit of the organization. With the challenge of lower demands, the profitability is further worsened. Therefore, my organization faces a challenge to come up with ways in order to improve profitability, either by finding ways to cut down on cost and lessen the higher prices of inputs, or boosting demand and repeat purchase among the customers. Reference List Appleyard, Field, & Cobb., (2006), International Economics (5th ed.). McGraw-Hill Irwin Barro, R. J., (1997). Macroeconomics. 5th ed. Cambridge, Massachusetts: MIT Press. Phelps, E., (1994). Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interests, and Assets. Cambridge, Massachusetts: Harvard University Press,. Samuelson, P. A. & Nordhaus, W. D., (2004), Economics (International Ed.). McGraw-Hill Irwin. Read More