Economic indicators and their effects on government, households, and businesses

¶ … Gross Domestic Product (GDP)

GDP or the Gross Domestic Product of a country is one of the basic tools used to measure how well an economy is performing. It is the measure of the value or worth of the goods and services that have been produced in an economy over a set time period. It may also be classified as the size of any country's economy and can provide as a helpful tool when measuring or conducting a comparative analysis about whether the country's economy has done better or worse than the previous years. Usually the GDP is calculated on an annual basis and then cross compared with the previous years to assess how well the year has been and whether the economy has grown in any way. There are two basic methods that economists use to determine the GDP, which are the income method which is determined by summing up whatever the people have earned over the year and the expenditure method by which the total expenses incurred are calculated and the GDP is derived as a result. Both the methods will technically add up to the same amount.

2. Real GDP

Real GDP is the measure of GDP that takes into account, the inflation rate that during that time frame. The increase in the price level of goods and services is accounted for which gives the actual or real amount of GDP for that period of time. The real GDP may also be known as "inflation corrected GDP" or "constant GDP." In a nutshell, Real GDP is adjusted according to the fluctuations in the price level.

3. Nominal GDP

Nominal GDP is that figure of GDP that does not account for the fluctuations in the price level over a certain time period. This measure is highly unreliable and misleading in nature because until and unless the inflation or deflation rate is accounted for, it is not for sure whether the economy has done better or worse than the year before. With an increase in the inflation rate, the GDP will be depicted as higher and the economy will be shown as doing well but in reality the higher figures are only because of the increase in price level.

4. Unemployment Rate

Unemployment Rate is that percentage of the total population that is willing and able to work but is still unable to find a job. They are part of the workforce and possess the skills and ability but the number of jobs in the market are lower than the amount of people available to work. Sometimes, frictionally unemployed people may also be counted in the unemployed rate, although they are unemployed by choice and because they are in the middle of a job switch. Unemployment rate is used as one of the indicators to show how well the market is performing. Third world countries are increasingly facing high trends in their unemployment rate and is accounting for reasons why their economies are not doing so well. There are various kinds of unemployment such as seasonal, frictional, structural and cyclical (Baranzini, 1996).

5. Inflation Rate

The inflation rate refers to the consistent and sustained increase in the general price level over a period of time in any country. The rise in inflation indicates a fall in the exchange rate and value of the currency as well as a decrease in the buying power of that particular currency against others. The inflation rate of any country is usually calculated by the Retail Price Index that takes up a basket of goods and compares their prices in the base year to the current years to assess how much inflation has occurred over the time period.

6. Interest Rate

The interest rate of any currency is the basically the price of borrowing a certain amount of money that the borrower has to pay along with the principal amount. The interest rate is a percentage of the principal that is charged by banks upon the sum of money that has been lent out. Banks charge a particular interest rate when they loan out money. However, commercial banks tend to have higher interest rates than the central bank.

Part 2: Effects of economic activities

1. Purchasing Groceries

This economic activity is an expenditure on part of the households whereby the people spend their income on basic necessities like this and consume goods and services produced by the businesses. The expenditures of the households are the income of the businesses. The businesses pay income tax and sales tax on the goods that they produce and their income that they earn which becomes a source of income generation for the government in turn. This is a cycle of money flow in the economy.