GDP can be measured in many different ways including value added method, income method or the expenditure method. The choice depends on the data provided, and accordingly we use the expenditure method in this case. This method defies (Econport.org, n.d.) GDp as ‘the sum of private consumption expenditures, investment expenditures , government expenditures and expenditures on net exports’
GDP=C+I+G+NX C= 600 +150 = 750
This includes consumption by households of both durable and consumption goods, so we add 600and 150
- Net exports= exports – imports
Net exports: NX = 75 -50 =25
- Total Investment is the sum of fixed Investment, inventory Investment and residential Investment
I = 100 + (125 -100) + 100 = 225 (Colorado.edu, n.d.)
- G = 200. Note that any payments made to retired persons are NOT part of GDP and are treated as transfer payments.
- The sales of existing houses in NOT included as they are for resale, and do not reflect any new production for this year.
- As per the above calculations GDP = 750+25 +225+200 = 1200
We use the framework of aggregate demand (AD) and aggregate supply (AS) that Keynes introduced as a means to pull out USA from the Great Depression of 1929. He showed that an expansionary fiscal policy can pull out an economy out of a recession temporarily.
This approach specifies that AD is made of 4 parts.
- Household Consumption expenditure
- Government spending/expenditure
- Firms spending on Investment
- Net exports that deal with the rest of the world. Net exports are simply the difference between total exports and total imports.
In notation: AD= C+G+I+NX
The AD curve is negatively sloped. This gives a negative relationship between GDP and price. AD rises when prices fall, and vice versa.
The AS (aggregate supply) curve is positively sloped to indicate that firms would be willing to produce and supply more at higher prices. When this was challenged by classical economists, it was deducted that this AS applies in the short/medium run only. In the long run the economy is at full employment and cannot increase supply further.
The equilibrium is determined at the point where AS equals AD, at E1.
A change in G will cause changes in AD curve. As spending rises by $9 billion, as part of G, the AD curve shifts upwards to AD2. The new equilibrium is found at E2 where GDP is higher (Y2) and so is price at P2.
CPI is an index of prices of selected goods. A change in CPI is considered as inflation or deflation. Total expenditure in base year or CPI in base year = (10*20) + 600 +100 +50 = 950
CPI next year = (20*11) + 640+120+40 = 1020
- Inflation = % change in CPI= 100*( 1020-950)/950 =7.3%
- To look at welfare, we must compare inflation with change in income. In this case the increase in income is 5%, and this is lower than inflation. This makes consumers worse off as compared to the base year.
Unemployment is a condition where a person willing to work a market rate /wage is unable to find work. Based on the causes and nature of economy, unemployment can be of many types: (Unemployment types)
This is the least harmful of all types of unemployment. This is because it is mostly voluntary, as it involves being jobless when a worker is between jobs. This refers to unemployment of a worker who has left a job on his own to look for better opportunities. Sometimes there is a cooling off period between jobs, where a worker is technically jobless but knows that the will be joining a new job on a pre specified date.
This can take another form of unemployment called SEASONAL UNEMPLOYMENT. Such unemployment is forced on workers due to nature of work involved. In agriculture this is common as the requirements of manpower very across season and off season. A worker maybe without a job in agricultural off season ( or non harvest season) but gets a job easily in season ( harvesting time when more manpower is required ). There is little than any State policy can do in this case as this unemployment is voluntary and well expected by workers. Such workers often find some other work in off season or prefer to remain unemployed till the next season arrives
This unemployment stems for the cycles of business- boom, recession, peak and troughs in the economy. As the economy does well in boom and peak times more workers get hired. Firms expand business as they have positive expectations for future, while a recession sees layoffs, increasing unemployment. This unemployment is also very common and easy to measure, which makes it a good indicator of economic conditions. It is used as an economic indicator as it is measured on a regular basis, making it the most visible form of unemployment.
As per OECD, ‘structural unemployment is the rate of unemployment consistent with constant wage inflation (non-accelerating wage rate of unemployment)’. In simple words it means the unemployment which occurs without any rise in wage rates. It is easier to understand it as unemployment that is caused by changes in the structure of the economy. For example, a shift to service sector will make some workers in agriculture redundant as they are not trained to be in service sector. Till these workers attain the skill sets for service they remain unemployed as agriculture can no longer absorb them( due to decline in agriculture sector). Such unemployment is structural unemployment. (Structural unmeployment, 2014)
It takes a lot of time and long term efforts to reduce this type of unemployment. This is because we need training and building of human capital to absorb such workers after they are rendered jobless.
The world ‘cycle’ suggests some form of regular motion like the movement of the tires of a cycle. In the same way a business ‘cycles’ refers to some pattern that business/economy follows. This pattern takes the form of a boom, peak, recession, slump (or trough) and a recovery in the end. After the recovery the economy starts to rise again and falls into a boom period. But in real life there is no regularity about these phases of a cycle. There is no finality to the duration of a any phase or how to measure the exact start and end dates of any phase.
Due to real life economic data being different from the theory of the business cycle outlined above, this word is termed misnomer. It was replaced by Milton Friedman, who replaced it with cyclical fluctuations, as the changes in economic variables like GDP and employment fluctuate around historical values rather than following a regular pattern.
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