Macroeconomics Guru

What is inflation? Inflation is simply an increase in the average level of prices, and a price is the rate at which money is exchanged for a good or a service. To understand inflation, therefore, we must understand money—what it is, what affects its supply and demand, and what influence it has on the economy. When we say that a person has a lot of money, we usually mean that he or she is wealthy. By contrast, economists use the term “money” in a more specialized way. To an economist, money does not refer to all wealth but only to one type of it: money is the stock of assets that can be readily used to make transactions. The Functions of Money Money has three purposes: it is a store of value, a unit of account, and a medium of exchange. As a store of value, money is a way to transfer purchasing power from the present to the future. As a unit of account, money provides the terms in which prices are quot- ed and debts are recorded. As a medium of exchange, money i...

            The most important concept of national income is Gross Domestic Product (GDP). Gross Domestic Product is the money value of all final goods and services produced within the domestic territory of a country during specific time. GDP measures both a nation’s total output of goods and services and its total income. The factors of production and the production technology determine the economy’s output of goods and services. An increase in one of the factors of production or a technological advance raises output. Competitive, profit-maximizing firms hire labor until the marginal product of labor equals the real wage. Similarly, these firms rent capital until the marginal product of capital equals the real rental price. Therefore, each factor of production is paid its marginal product. If the production function has constant returns to scale, then according to Euler’s theorem, all output is used to compensate the inputs...