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Macroeconomics - Understand the GDP, Business Cycle and Equilibrium

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  • Macroeconomics - Understand the GDP, Business Cycle and Equilibrium

    Since we have discussed the consumer price index, inflation and unemployment in the last article, in this article we will discuss the economic growth, the business cycle and macroeconomics equilibrium in one nation economy.

    1. GDP

    This measures all income and output through a series of national accounts. At the end of their fiscal year, all cash flow in and out is added up to determine the GDP. Real GDP is the adjustment for the distortion caused by inflation by measuring the fiscal output of goods and services in a given year against the prices of a base year while nominal GDP measures output using current year prices.

    2.The business cycle

    A country economy moves in a familiar pattern of four cycles
    a) contraction:slow down in growth or recession.
    b) trough: bottom end of the cycle
    c) expansion: growth increases or recovery of the economy.
    d) peak: top end of the cycle.

    The normal business cycle experiences continuous fluctuations with one cycle leading - no matter how prolonged - to the next and the recession is defined as 2 consecutive quarters of declining growth in real GDP.

    When the economy expands: unemployment decreases,inflation begins to increase and the real GDP rises.

    On the other hand, when the economy contracts: unemployment increases, inflation decreases and the real GDP falls.

    3. Macroeconomics Equilibrium

    Instead of targeting any one price or supply as in microeconomics the economist apply the measurements against the price level and output for the entire economy. This is accomplished by adding up all the totals for the entire period.

    a) Aggregate demand curve (AD)

    The AD measures the relationship between the total amount of all output that consumers are willing to purchase and the price level of that output. AD is the sum of what consumers, governments, business and foreigners, through exports and imports spent in the nation economy.

    b) Aggregate supply curve (AC)

    AC correlates the relationship between the total amount of final goods and services all producers plan to supply at a given price level.

    The two curves are used to predict changes in the real GDP and price levels and the curves reflect what occurs in macroeconomics measurement curves.Where this two curves cross over shows macroeconomics equilibrium.

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