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Fundamentals of Macroeconomics Sample

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Fundamentals of Macroeconomics

The study which focuses on the economy as a whole and the amount of national income is known as macroeconomics and it is very essential for any country’s economy. The level of total output assesses the value of an output generated in a country’s economy in a given period of time the lawmakers must be alert of the level of economic efforts being carried out in the nation on behalf of the citizens. The governments’ main goal is to elevate economic growth rate which can only be achieved through evaluating the national income. The national income statistics evaluated by the government have the following uses:

  • The statistics indicates the present resources allocation
  • Assists the government in planning its economy
  • It gives a signal about the standard of living of a nation
  • It assists in showing the contrast of living standards between various nations.

Gross National Product, The GDP per capita, Gross Domestic Product and Net National Product are some significant concepts of the National Income.

Gross domestic product (GDP)

This refers to the total value of every production achieved through the use of resources available within an economy over a specific duration of time. According to Sullivan (2003), GDP refers to the market value of the total goods and services a country produces in a specific duration of time. Gross Domestic Product evaluates the annual value of every economic effort occurring within an economy and the evaluations are on the basis of value added to keep away from the crisis of double counting. The following are the only methods of computing the GDP and they are supposed to give a similar result:

  • The Output Method
  • The Expenditure Method.
  • The Income Method

Nominal GDP

The nominal GDP is as well referred to as the money GDP and is evaluated as the operating prices in the period that the output is generated. At times, it is known as the GDP at market prices. The nominal GDP can provide an erroneous indication about the economy’s growth due to variations in the value of money that relies on the level of prices, and which might change any time. The national performance of an economy is calculated through nominal GDP which is converted into real GDP. Real GDP is an evaluation of change in inflation. Consequently, Real GDP can be achieved by multiplying money GDP/ present year price index by the base year’s price index or money GDP/GDP deflator of the present year multiplied by the base year’s price index.

Rate of Unemployment

Employment rate refers to total population of individuals with a job that includes businessmen, employees and self-employed individuals. Various aspects might impact this number and cause a change. While rate of unemployment is the total population of individuals who are available, competent, registered and have the passion to work at the present rate of salary and at any fitting job, but cannot get the opportunity. The rate of Unemployment is assessed at a point of time and rate of changes relating to unemployment over given period of time. The total unemployed means the total number of individuals who are adults already and do not have a job even though they are available to be employed and receive the present rates of salary. While the unemployment rate refers to the adults without job, but are available for work at current wage rates is expressed as the total labor force percentage.

Rate of Unemployment = Unemployed X 100

Labor Force

Rate of Inflation

Inflation is referred to as the continual or persistent hike in the general level of price. it can as well be described as the change in general prices in a particular economy over a certain period of time. The evaluation of price level is performed in form of index. For instance, if the current price index is 90 and 110 in the subsequent year, then the rate of inflation would be 20%. In macroeconomics, the “rate of inflation is an evaluation of inflation, the price index rate of increment and it is the percentage change rate in price level in a given period of time” (Sullivan, and Steven, 2003).

It can be computed as follow:

Inflation rate = P0 – P -1 X 100 P-1

Interest rate

The rate at which a borrower pays interest for using the money of the lender is referred to as interest rate. For example, the money received by the borrower and used to grow his/her business belongs to a lender and in return the borrower pay s back the money with interest. The interest is paid at a prearranged rate of interest because of suspending the use of this money and as an alternative lends it to the borrower. Interest rates are usually presented as an annual percentage of the principal.

The targets of interest rates are a very crucial tool in the monetary policy. The interest rates are perceived as crucial in the computation and when it comes to deal with variables such as unemployment, inflation and investment. In macro economics, they are of great importance and they are computed as follow:

r = 1 + i -1

1+ p

The above discussed variables of economics are very essential tools of macroeconomics and they are used to compute the rate of economic events and growth in a given period of time. Buying groceries is an event that engages procure and sale at a particular level. The groceries procurement creates more demand at a price that covers the production cost, wages being inclusive. If we assume the economy model of two sectors involves the business and household. Land, capital and labor are some of the possessions used in producing services and goods are owned by a household while the business or companies produces service and goods by employing the possessions owned by households. The payment of the possessions is given to the households who in turn spend the payments to procure groceries from the companies or businesses. The output generated greatly contributes to the Gross Domestic Product, as the extra contributes to the total output in the present year in relation to the additions or withdrawals into the economy.

The economy directly affects the income and employment of a nation, when the economy is subjected to an enormous suspension of employees and this minimizes the collective demand lessening the price level disheartening further investment in the business. The production is adversely deteriorated by the condition, negatively impacting the GDP in that specific year. This situation persists unless counteractive fiscal and monetary approaches are taken.

When the taxation rate is minimized by the government, this elevates the rate of consumption and this increase the price and demand, which eventually compels investors to make more investment and bring up the level of economic events. The income level will escalate due to increased employment and this would further elevate the collective demand. Therefore, a decline in taxation contributes to a rise in the collective demand that would elevate the income, employment and other events related to economy in any given economy. It may as well result to inflation if it surpasses the limit.

Reference:

  1. World Bank, Statistical Manual >> National Accounts >>GDP–final output, retrieved January 2012. “User’s guide: Background information on GDP and GDP deflator”. HM Treasury. http://www.hm-treasury.gov.uk/data_gdp_backgd.htm.
  2. “Measuring the Economy: A Primer on GDP and the National Income and Product Accounts”
  3. (PDF). Bureau of Economic Analysis. http://www.bea.gov/national/pdf/nipa_primer.pdf.
  4. Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle
  5. >River, New Jersey 07458: Pearson Prentice Hall. pp. 340. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4<