Fundamentals of Macroeconomics

According to Colander (2013) gross domestic product, or GDP, “is the total market value of all final goods and services produced in an economy in a one-year period” (p.545). A major component of our GDP is groceries. Grocery purchases can have a tremendous effect on the economy and thus our GDP. The purchaser exchanges currency for their chosen items. The government gets a portion of the proceeds in taxes. The government then uses this tax revenue to fund the government. A large portion of the tax revenue funds entitlement programs such as welfare. Additionally tax revenue pays the salaries of government employees. Recipients of funds from entitlement programs as well as wage earning government employees in turn use those dollars on various expenditures that may include buying groceries. On the other side of equation the revenue the store generates from sales pays the salaries of its employees which starts the cycle over again. Additional monies are given to vendors of the products the store purchase for retail sales thus funding those companies, their employees and vendors with most everyone at every turn paying taxes. Prices tend to rise as spending increases. It is in essence a continuous cycle or movement of funds from one person or entity to another.
During a recession households may reduce their spending on items such as grocery purchases by limiting their spending to the few items they deem necessary. When people start to hold on to their money instead of spending it, money is pulled out of the economy. Businesses such as grocery stores see less income and may cut back on employee’s hours or even lay off employees. Less tax revenue is generated and government spending may tighten. Government programs may be cut and additional employees will see layoffs. Individual spending tightens more, prices fall and the ripple effect on retailers continues to grow.

There are many steps the government can take to stem the tide of the slowdown and increase costs thus putting money back into the economy and increasing spending. The United States government may subsidize crop production, such as corn, which is used not only as a food source but also as a bio-fuel. Subsidizing corn takes corn out of the food supply and causes in increase in corn prices. Another aspect revolving around corn production is that the World Trade Organization (WTO) may place limits on the amount of corn that the United States can subsidize and store in stockpiles causing a reduction in the food supply increasing volatility in corn prices (Amadeo 2012). A third aspect is worldwide consumption of meat. Food stuffs such as corn are not only used for bio-fuels, it is consumed by humans as food as well as being consumed by the animals we will in turn eat. We will subsequently see a decrease in the supply of corn and an increase in prices. The price of corn is also affected by fuel costs. Corn and meat are shipped worldwide and it takes lots of fuel to move it. As the cost of transportation increases so does the cost of our food.

References

Colander, D. (2013). Economics (9th ed.). New York, New York: McGraw-Hill Irwin.

Kimberly Amadeo. (2012). Why Are Food Prices Rising. Retrieved July 9, 2012. http://useconomy.about.com/od/inflationfaq/f/Why-Are-Food-Prices-So-High.htm