Real GDP Vs Nominal GDP; Does GDP Measure What We Want To Measure?; Policy Of Quantitative Easing; Effects On Exchange Rates; Multinational Corporations In Developing Countries: Benefits And Challenges; Governance And Economic Growth

Real GDP Vs Nominal GDP

1).a

1)The gross earnings of a movie not only depend on the number of viewers but also on the average price of the tickets. Earnings might be higher not because of more viewers but because of higher price per ticket. The true performance of the movie is this overstated if values are grossed based on current year prices (Goodwin et al. 2014). The average ticket price of avatar in 2008 was US $7.18. The price is almost 56% higher than that of the price of movie ticket Titanic. Therefore, if inflation adjustment is done then gross earnings of Avatar may be higher than that of Titanic despite the fact that less number of viewers actually have gone to theatre.

2) The appropriate measure of how well a movie performed is at the box office is the inflation adjusted dollar value. The inflation adjusted dollar values represents the dollar value at constant prices (Agénor and Montiel 2015). A higher inflation adjusted ticket price represents a relatively high value of the movie ticket. The high price of movie ticket in turn represent a high demand for viewing the movie. The high demand is a representative measure of good performance of the movie. In order to capture true performance of the movie the newspaper report dollar value of the movie tickets instead of number of ticket sold.

3) Comparison of number of ticket sold by all movies in 1939 with the total number of movies sold in 2015 is not a good way to measure the relative importance of the movies in the economy has changed overtime. Variation in the number of movie ticket sold resulted from a number of factors (Bernanke, Antonovics and Frank 2015). For example, population might be increased leading to an increase in number of tickets sold. An increases in income leads to a greater affordability for movie tickets. The importance of movies can only be reflected from a price comparison of tickets in the two periods.

b).

1)Gross Domestic Product is a representative measure capturing monetary value of all the final goods and services produced in a given time frame. A higher GDP indicates a better performance for the overall economy. Larger GDP means more the country is able to produce more goods and services contributing to welfare of its people (Heijdra 2017). Aggregate values of good and services though not the only determinant of quality of life, it is generally assumed that people enjoy a better quality of life in nations having a large size of GDP as compared to those having a relatively small GDP.

Does GDP Measure What We Want to Measure?

2) GDP is not considered as an imperfect measure of well-being as there is a number of aspects that are not covered under the spectrum of GDP. It does not include goods and services produced within the household but are not marketed. Neither it does include activities of the underground economy (Uribe and Schmitt-Grohé 2017). However, even inclusion of this activity does not make GDP a perfect measure as it fails to measure qualitative aspects like quality of health, education, happiness, leisure and such other thing having significant influence on well-being.

2).a

The policy of Quantitative Easing (QE) refers to a program by which central bank plans to expand market liquidity. ECB adapts the technique of QE to inject liquidity in the euro market through purchasing assets and sovereign bonds (Johnson 2017). The policy has direct and indirect consequence on a number of macroeconomic variables.

The first direct impact of QE policy is in the market of real money balance. With increasing supply of money, the money supply curve (M_S) shift rightward. The increased supply of money reduces the interest rate from r* to r_1.

Investment has an inverse relation with interest rate (Mankiw 2014). As interest rate declines from r* to r, investment increases from I* to I_1. With increases in productive investment, output expands and so is the consumption.

The increased consumption and investment result in a higher aggregate demand. The aggregate demand curve shifts from AD to AD_1. As the economy moves from point A to B, both output and price level increase.

2) Interest rate is an important determinant of exchange rate. The flow of foreign capital depends on the interest rate. The supply of foreign reserves varies along with interest rate and thus affect the exchange rate. The quantitative easing policy reduce the euro interest rate (Sadat 2017). The effect of euro value and exchange rate is described in the figure given below.

Policy of Quantitative Easing

The lower interest rate in countries of EU makes Euro less attractive as a means of investment. This leads to an outflow of foreign capital. This reduces supply of foreign currencies in the foreign exchange market. Consequently, the value of euro declines causing euro currencies to depreciate against other currencies.

The relative value of currency in turn determines the magnitude of export and import. Because of currency depreciation the exported goods from EU becomes cheaper in terms of other currencies. This helps to boost export. As the imported goods has now become relatively expensive, import reduces (Dullien et al. 2017). The trade balance thus likely to improve leading to an improvement in current account balance. The depreciated currency in turn enhance competitiveness of EU economy in the global market.

b).

An increase in US interest rate affects the value of Australian dollar by influencing movement of foreign capital. Increase in US interest rate encourage investors to invest money in US dollar denomination. As funds are withdrawn from Australian exchange market there is a shortage of dollar in Australia. This increases the value of US dollar while reduces the value of Australian dollar. This results in a depreciation of AUD exchange rate against US dollar. The lower value of Australian good make its exportable cheaper in the world market (Heijdra 2017). A related consequence of exchange rate depreciation is the higher cost of import which reduces import volume. Accordingly, the current account balance improves following an increase in export earnings.

2)

An increase in US interest pull out funds from Australian foreign exchange market. Australian investors are now interested in investing in US market. This increases the flow of Australian dollar into US foreign exchange market. As the supply of Australian dollar increases, the supply curve of AUD moves outward to S₂S₂. Equilibrium in the foreign exchange market shifts from e₁ to e₂ results in fall in US/AUD exchange rate. This in turn implies an appreciation of US dollar against AUD. The currency appreciation has an adverse effect on current account balance (Bernanke, Antonovics and Frank 2015). Following an appreciation of exchange rate the export from US falls while import into US increases. This worsens current account balance.

Effects on Exchange Rates

3). a

1)The multinational corporations establishing facilities in developing countries have a beneficial effect on countries in which they operate. The companies generally involve in very effective and defensible activities in the developing countries. The productive capacity in these countries often remain unexplored due to lack of funds (Kennedy, Welch and Monshipouri 2017). The MNCs help to explore the productive capacity fully. The new job opportunities help to reduce unemployment in these countries. This along with a higher prospect of income break the vicious cycle of poverty in these countries.

This is however not always the case. The MNCs often pay a lower wage to workers in developing countries as compared to those in home countries. The working condition is also different between countries (Siddique, Nawaz and Majeed 2016). The MNCs often exploits the low wage workers in these countries. This offset the beneficial effect of MNCs operation.

2) The institution and process through which decision are made and exercised in a country is known as governance. A good governance improves economic growth and development by improving business environment. The quality of business environment is a key influencing factor of investment and resulted economic growth. The set of policies that affect operation of a business such as taxation laws, regulatory compliance and macroeconomic environment depend on the existing set up of the governance (Chiu 2016). Quality of the set of policies depend upon the presence of inclusiveness in combination of accountability mechanism which are two instrument of governance. Good governance thus helps attract more business accelerating growth and development.

3) Rapid economic growth though brings economic well-being of the people in a country. The fast economic growth in addition to is good impact comes with some added cost. The faster growing countries often experience a sharp rise in the trend inflation rate, called structural inflation. Rapid growth in terms of rapid spread of industrialization creates serious concerns for environment. Other negative consequences of fast growth are deforestation, over exploitation of natural resources, imbalance in biodiversity and such others (Bernanke, Antonovics and Frank 2015). High income countries are more vulnerable to such risks as they are in the advanced stages of economic growth. The low income countries on the other hand are still in the initial stages of growth and hence are less bothered about negative consequences of economic growth.

b.

1)i) As the length of time workers are eligible to receive unemployment benefits payment double, people gets additional incentive to remain unemployed. With increases in duration of unemployment benefit payment people are discouraged to find jobs for them. This likely to increase the prevailing rate of unemployment.

ii) Minimum wage is generally set above the equilibrium wage in the labor market. The high wage causes business firms to reduce their labor demand. Abolition of minimum wage thus increases labor demand and thus help to reduce unemployment rate.

iii) The trade unions though increase the bargaining power of workers but it has unwanted consequence of higher unemployment. As more workers join trade union, the power of union increases but the unemployment might increase if the trade union pressurize employer to increase wage to a very high level.

2) The real interest rate is the inflation adjusted measure of interest rate. The real interest rate equals nominal interest rate plus inflation rate (Agénor and Montiel 2015).  During 1990s, Bank of Japan took expansionary monetary policy which cut the nominal interest rate to a significantly low levels. Along with nominal interest rate the inflation rate was also falling. This implied a relatively smaller reduction in real interest rate. During this time thus though nominal interest fell to zero but real interest rate was different from zero. This is the reasons why lenders of funds agree to a nominal interest rate of almost zero percent.

References:

Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University Press.

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Chiu, W.H., 2016. Political governance and economic growth: evidence from emerging economies. International Journal of Economic Perspectives, 10(4), pp.376-394.

Dullien, S., Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2017. Macroeconomics in Context: A European Perspective. Routledge.

Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in context. Routledge.

Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.

Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.

Kennedy, E.T., Welch, C.E. and Monshipouri, M., 2017. Multinational corporations and the ethics of global responsibility: Problems and possibilities. In Human Rights and Corporations (pp. 123-147). Routledge.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Sadat, S.D., 2017. Rethinking Macroeconomics: An Introduction. International Journal of Economics, Management and Accounting, 25(3), pp.635-639.

Siddique, H.M.A., Nawaz, A. and Majeed, M.T., 2016. The Impact of Institutional Governance on Economic Growth: A Panel Data Analysis. Bulletin of Business and Economics (BBE), 5(4), pp.210-219.

Uribe, M. and Schmitt-Grohé, S., 2017. Open economy macroeconomics. Princeton University Press.