Term Definition Papers

“Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society” (Colander 2007, p. 4). This special area of study deals with three key coordination problems any economy must solve: what to produce, how to produce it, and for whom to produce it (Colander, 2004, p. 5). Specifically, macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national economy as a whole (Wikipedia Website, 2007, Macroeconomics section).

Economics is widely accepted as a unique area of study. It examines the concepts of Gross Domestic Product (GDP), Real GDP, unemployment rate, inflation, and interest rate. This area of study gives further consideration to other concepts, like a circular flow diagram that illustrates the interaction of households, government, and business. In this analysis, I will describe how current economic conditions are effecting your organization or one which you are familiar. I will also identify the most important economic indicator affecting your organization and explain why.

Gross domestic product (GDP) is one of the ways of measuring the size of an economy (Wikipedia Website, 2007, Gross Domestic Product section). “The GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year).” Real Gross Domestic Product (real GDP) is the market value of final goods and services produced in an economy, stated in the prices of a given year (Colander, 2004, Glossary section).

When the U.S. economy is slowing down or is in a recession, the unemployment rate will go up (Colander, 2004, p. 497). When people lose their jobs, they will reduce their consumption, starting the multiplier process, which decreases income (Colander, 2004, p. 498). The unemployment rate is the percentage of people in the economy who are willing and able to work but who are not working (Colander, 2004, p. 497).

In economics, the inflation rate is the rate of increase of the average price level, usually some form of consumer price index. Alternatively, the inflation rate is the rate of decrease in the purchasing power of money. The interest rate is the price paid for use of a financial feature.

As you can see from the chart below, the circular flow diagram is divided into three sections that all interact with one another: households, government, and business. Individuals from households buy from businesses and firms, households supply businesses with labor, and the government taxes businesses.

Figure 1: Notice that goods & services and resources flow around the economy in one direction, while money flows around the economy in the opposite direction. This is because money is usually exchange for goods & services, or for resources (Lewis and Clark Website, 2007).

Economic indicators are a prediction about the economy (Wikipedia Website, 2007, Economic Indicator section). They help us to predict supply as well as demand. “Economic indicators allow analysis of economic performance and