November 15th, 2010
Individual Term Definition Paper: Week #1
In this paper I will define Gross Domestic Product (GDP), Real GDP, Unemployment rate, Inflation rate and Interest rate. I will discuss how the circular flow diagram illustrates the interaction of households, government and business. Finally, I will explain how the current economic conditions are affecting my business and identify the most important economic indicator affecting it and why. Gross Domestic Product or GDP “is the total market values of all final goods and services produced in an economy in one year” (Colander, 2008, pg. 533). GDP = Consumption + Investment + Government spending + Net Exports. Consumption represents the spending by households on goods and services. Investment reflects spending for the purpose of additional production. Government spending is the goods and services that the Government buys. Net Exports is exports minus imports. Real GDP “is nominal GDP adjusted for inflation” (Colander, 2008). To calculate Real GDP, Nomial GDP is divided by the GDP deflator and is multiplied by 100. The Unemployment rate “is the percentage of people in the economy who are willing to work but who are not working” (Colander, 2008, pg. 512). Inflation rate “is the measure of the change in prices over time” (Colander, 2008, pg. 521). Interest rate “is the prices paid for the use of a finacial asset” (Colander, 2008, pg. 634). The circular flow diagram show the interactions between households, government and business. Households and business interact in what is called the ‘factor market’ by the households supplying business with labor and other factors of production and are in turn, paid for by business. In what is known as the ‘goods market’ the households, government and business interact by the selling of goods and services of buisness to households and government. Our economy is also connected to the...