GDP= Total national income+ indirect business taxes+ depreciation+ net foreign income (Petroff, 2013)
Total national income= Sum of all wages, rents, interest and profit
Total national income= 1687+ 482+ 2651
Total national income= $4820billion
GDP= 4820+0+320+0
Indirect business taxes = 0
Depreciation= 320
Net foreign income= 0
GDP= $5140 billion
GDP= C+I+G+NX (Petroff, 2013)
C= consumption
I= investment
G= government purchases
Net Export= Export-Import
GDP= 3115+ (320+785)+ (585+210)+ (690-565)
GDP= 3115+ 1105+ 795+125
GDPMP= $5140 billion
GNE= C+I+G+IM
IM= import expenditure
GNE= 3115+ 1105+795+565
GNE= $5580 billion
NDP= GDP-Depreciation
NDP= 5140-320
NDP= $4820 billion
It is accepted that Net Domestic Product is a better measurement than Gross Domestic product because it has the ability to control depreciation. It is necessary to control depreciation in real world because the capital that is formed has some rate of usage and depreciate with time. However, GNP is also regarded as a bad measure because depreciation distorts its calculation and depreciation is a non-measurable variable. However, the deduction that it calculates helps the economy to know its performance over the year and the improvement that it should take in future (Gwartney, Stroup & Clark, 2014).
GNP= GDP+ Net income inflow from abroad-Net income outflow to foreign countries
GNP= 5140+ 0-34
GNP= $5106 billion
NNP= GNP- Depreciation
NNP= 5106- 320
NNP= $4786 billion
Current Account Balance= export-import+ Net income+ Net Current Transfers
CAB= 690-565+ (-34)+0
CAB= $91 billion
Gross national savings= Y-C-G (Tucker, 2010)
Y= GDP
C= consumption
G= Government spending
Gross national savings= 5140-3115-(210+585)
Gross national savings= 5140-3115-795
Gross national savings= $1230 billion
Tax revenues= $17 billion
National savings= private savings- public savings
National savings= (Y-T-TR-C)+(T-G-TR)
National savings= (5140-17-0-3115)+(17-795-0)
National savings= (2008-778)
This shows that with a tax income of $17 billion the value of national savings is same as above.
MPCd= ΔC/ΔY (Tucker, 2010)
0.63= ΔC/4873
ΔC= 4873*0.63
ΔC= $3069.99 billion
Thus, the domestic consumption falls with a change in marginal propensity to consume(Gwartney, Stroup & Clark, 2014).
GDP= C+I+G+NX (Heijdra, 2017)
New export= 690+4= $694 billion
New private sector investment= 785- 3= $782 billion
New Government consumption=584-3= $581 billion
New government investment= 210+4= $214 billion
GDP= 3115+320+782+581+214+(694-565)
This shows that GDP increases by $1 billion.
The GDP of the economy is $870 billionasit is the total amount of goods and services that the economy produces by the residents of the country. This shows the it abides by the definition of Gross Domestic products that states that it is the dollar value of all goods and services that the country produces over a specific period of time (Mankiw, 2014).
The definition of final goods states that it is the goods that is directly used by end user for consumption. The new truck that is owned by a mining company is a final good because the company is the end user for the truck even though it assists in further production. The truck is not the intermediate good that helps in digging of mines. It is used as a final good for transferring goods. Thus for the company the truck is a final good.
The value of the truck will be added in the GDP of the country because it is a final good. On the other hand, the goods that the truck is carrying from the mining industry are intermediate goods and will be used for further production for production of energy or other products. GDP adds the value of all final goods and thus value of truck is added (Mankiw, 2014).
Figure1: Cost-Push inflation
The above diagram shows the two types of inflation such as cost-push inflation and demand pull inflation. The main difference between both the types of inflation is that one is caused due to a push or increase in prices and the other is caused by an increase in demand. The cost-push inflation is the one that leads to increase in price level for goods and services in an economy due to fall in aggregate supply after an increase in cost of production. On the other hand, in demand-pull inflation there is an increase in price due to increase in demand. One is due to producers and the other is due to consumers(Gwartney, Stroup & Clark, 2014).
Cost-pull inflation is caused due to decrease in supply of goods due to increase in cost of production. Demand remaining constant, supply falls below demand that causes increase in price. Cost-pull inflation is caused due to changes on producer side (Jain, 2015).
On the other hand, demand-pull inflation is caused because with a constant aggregate supply there is an increase in demand causing price to rise. This happens when the demand exceeds supply and any changes from consumer’s side (Acquah-Sam, 2017).
Macroeconomic policy can be formed for reducing unemployment in a country that could curb the demand such as fiscal and monetary policy. However, it has been stated that a measured zero unemployment is impossible to reach in any economy with any possible this claim was put forward by the Phillips Curve that stated that with an increase in inflation there is a decrease in unemployment(Orlandi, 2014). However, neither a point of zero unemployment is reached neither there will be a zero inflation scenario. Thus, no macroeconomics policy will create zero unemployment rate (Layton, Robinson, & Tucker, 2011).
According to the classical economist, it is seen that the rate of unemployment reduces below the natural level in the short run. However, in the long-run it is seen that the unemployment rate returns to its natural rate. This also causes an increase in the inflation rate in the economy. This is because long run does not have any trade-off (Boyes,& Melvin,2013).
Structural unemployment is termed as an unemployment that is caused in the long-run. It is a type of unemployment that is caused when the people are willing to work in an economy; however, the companies lacked the inability of offering jobs (Quercia, Pennington-Cross & Tian, 2016).
On the other hand, cyclical unemployment is caused when there is a fluctuation in the economy or any downturn. Suchdownturns cause loss of jobs and unemployment rises in the economy for that period (Orlandi, 2014).
Policy maker should be concerned about structural unemployment because it might adversely affect the purchasing power and total GDP of the company. Cyclical unemployment should also be curbed as it might increase unemployment rate extremely in the economy (Diamond, 2013).
The major difference between both the monetarist and Keynesian theory of monetary policy is that monetarist believes in implementing tight monetary policy and Keynesian believes in expansionary monetary policy. Such thing lies on the assumption that monetarists believe in control of money supply and Keynesian believes that downturns in the economy can be resolved by increasing the purchasing power of the consumers (Mankiw, (2014).
A decline in marketing activity will not allow the company to increase its brand recognition and advertise its product and thus leads to a decrease in aggregate demand. This in turns leads to fall in prices and decrease in the GDP of the economy (Mankiw, 2014).
An increase in import in the nation will lead to an increase in supply of goods in the country due to increase in the number of foreign goods. This will cause a fall in price due to excess supply and an increase in the GDP of the nation(Mankiw, 2014).
A destruction in economy’s capital stock leads to fall in the supply of the nation because there will be less factors available for production purpose. This causes an increase in price level due to excess demand in the market and a decrease in the GDP of the nation (Benhabib, Wang, & Wen, 2015).
Decrease in personal income tax causes more disposable income in the hand of the people causing an increase in purchasing power and demand for goods. This in turn causes and increase in price due to excess demand and increase in GDP of the nation(Palley, 2014).
The major advantages of using Consumer Price Index are that it is one fo the most quantifiable method of measuring prices. CPI allows to measure large numbers in single group, this makes it a legit indicator(Gwartney, Stroup & Clark, 2014).
The disadvantage is that CPI does not considers the increase in price due to improvement in quality of the product. Moreover, new products enter markets continuously making it difficult to calculate using the CPI method.
There are different effect of increase in price on different kind of people. This is seen because the poor people lose out more during inflation as the money they have buy less goods after the increase in price. On the other hand, rich people lose less during inflation. Similarly lenders lose during inflation and borrowers gain during inflation. This is because, lenders now get the less value of money after the price has increased. Thus, the effects are different on different people(Gwartney, Stroup & Clark, 2014).
The Australian measure of unemployment is not that accurate as it offers only a one-sided survey of unemployment. Moreover, it offers only measure of employment and does not shows anything about the number of jobs the country has. The method also fails to calculate the ill and retired people under the measure of unemployment, making it an inaccurate measure for unemployment rate (Hubbard, Garnett, & Lewis, 2012).
References
Acquah-Sam, E. (2017). Influencers of Inflation in Ghana. European Scientific Journal, ESJ, 13(7).
Benhabib, J., Wang, P., & Wen, Y. (2015). Sentiments and aggregate demand fluctuations. Econometrica, 83(2), 549-585.
Boyes, W., & Melvin, M. (2013). Fundamentals of economics. Cengage Learning.
Diamond, P. (2013). Cyclical unemployment, structural unemployment. IMF Economic Review, 61(3), 410-455.
Gwartney, J. D., Stroup, R., & Clark, J. R. (2014). Essentials of economics. Academic Press.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Hubbard, G., Garnett, A., & Lewis, P. (2012). Essentials of economics. Pearson Higher Education AU.
Jain, S. (2015). What Causes Inflation in India?.
Layton, A. P., Robinson, T. J., & Tucker, I. B. (2011). Economics for today. Cengage Learning.
Mankiw, N. G. (2014). Essentials of economics. Cengage learning.
Orlandi, F. (2014). New estimates of Phillips curves and structural unemployment in the euro area. Quarterly Report on the Euro Area (QREA), 13(1), 21-26.
Palley, T. I. (2014). Aggregate demand, endogenous money, and debt: a Keynesian critique of Keen and an alternative theoretical framework. Review of Keynesian Economics, 2(3), 312-320.
Petroff, J. (2013). National Income Accounting. PEOI. org.
Quercia, R. G., Pennington-Cross, A., & Tian, C. Y. (2016). Differential impacts of structural and cyclical unemployment on mortgage default and prepayment. The Journal of Real Estate Finance and Economics, 53(3), 346-367.
Tucker, I. B. (2010). Economics for today. Cengage Learning.
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