The Basics of Macroeconomics

A number of factors, known as macroeconomic principles, are used as indicators of the overall performance of the economy. These principles include such factors as Gross Domestic Product (GDP), Real GDP, the unemployment rate, the inflation rate, and the interest rate. This analysis will define these macroeconomic principles, along with a discussion of the circular flow diagram, which illustrates the interaction of households, government, and businesses. A conclusion will discuss how economic conditions are affecting my organization, and which is the most important economic indicator affecting my firm.

There are a number of macroeconomic principles that are used as indicators of the health of a particular nation’s economy, including GDP, real GDP, inflation, interest rates, and unemployment rates. Gross Domestic Product is one of the most significant economic indicators of the state of any economy. GDP “measures an economy’s total expenditures on newly produced goods and services and the total income earned from their production” (Macroeconomic, 2008, p. 1). GDP is the sum of consumption spending, investment spending, government spending and imports and exports.

Real GDP is aimed at separating the impact of inflation on GDP. Real GDP is “the production of goods and services valued at constant prices” (Measuring, 2008, p. 3). With inflation taken out of the equation, real GDP measures the size of economic activity. Inflation, interest, and unemployment rates are also macroeconomic principles used to measure the health of an economy. Inflation measures “at what rate prices in an economy are rising” (Measuring, 2008, p. 4). The Federal Reserve Bank tries to control inflation by setting the country’s base rate of interest. The interest rate is the rate of interest charged by banks on loans. When interest rates are low, firms often borrow more money to increase production or expand capacity. When…

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