Economics Homework Paper on the Economy

The Economy

The economy in general sense refers to a system within a country through which goods and services are produced, distributed and consumed in exchange for money. Agents who produce, buy and sell goods services drive the economy. These include; citizens, private and public companies and the government. The three major economic indicators Gross Domestic Product, Unemployment and Consumer Price Index are discussed below.

The Gross Domestic Product is the main economic indicator and it is commonly applied in evaluating national economic performance. It shows the total cost of goods and services produced and sold by a country within a time period. It aggregates total household consumption, private business investments, government investments and net exports. Thus if the GDP increases it implies that some or all of its elements have increased which is a positive sign for the economy. For instance, increased household expenditure implies that households are earning more and therefore can afford to spend more. Increased net imports would imply that the country sold more of its goods abroad, earned more foreign revenue and thus improved its economic status.

Unemployment is considered as an economic indicator because it is a determining factor to the components of GDP. When unemployment rate is high, it implies that more people are not employed and therefore do not earn. Low earnings by the general population translate into minimal spending thus household expenditure drops and therefore the GDP.            High unemployment could also mean that businesses are not investing in expansion to create more job opportunities, which imply that the private investment factor in the GDP is low, and thus the GDP itself. Consumer price index measures inflation, which is the general increase in prices. High inflation is adverse for an economy because it reduces the purchasing power of the currency therefore draining savings and discouraging investment and general expenditure. The three economic indicators discussed have been chosen because they are the mostly applied and their effects such as the effects of unemployment and inflation, are obviously felt by the ordinary citizens.