National Accounting Data And GDP Calculations Assignment

Calculating national accounting data for a given year

Q 1

(a)GNP, GDP, NNP, NDP 

GDP = C+I+G+(X-M)

C=HOUSEHOLD CONSUMPTION

C=services (education, medical visits, haircuts etc)+durable goods (cars, appliances, furniture)+non-durable goods (food, clothing, petrol)

C=HOUSEHOLD CONSUMPTION
services	4000
durable goods	600
non-durable goods	2000
Total	6600

      

GDP  ,Expenditure Approach
HOUSEHOLD CONSUMPTION	6600
Gross private domestic investment	1000
Change in business inventory	50
Government spending	800
Exports	100
Imports	150
GDP  [C+I+G+(X-M)]	8400

GDP  ,Income Approach
Wages= Compensation of employees	5000
R= Rent = Rental income	100
I = Interest = Net interest	500
P = Profits = Corporate profit+ Proprietors’ income Costanza et al., (2009)	1600
GDP  [W+R+I+P]	7200

GDP  [C+I+G+(X-M)]	8400
Capital depreciation	950
NDP	7450

 Net national product (NNP) = NDP -Factor payments to the rest of the world(Musu, I., & Siniscalco,  (2012)) 

NDP	7450
Factor payments to the rest of the world(interest & dividend paid to the overseas investors)	300
NNP	7150

GNP (Gross National Product) =GDP+ factor income received from abroad-factor income paid to abroad Balli et al., (2010).

GDP  [C+I+G+(X-M)]	8400
Factor payments from the rest of the world	360
Factor payments to the rest of the world	300
GNP	7740

 (b) Calculation of net export & trade surplus or deficit in current account

Exports (X) = expenditures made by the foreigners on domestically produced goods and services, so this is a foreign investment

Imports (M) = Investment of the country in dollar amount of a nation for  purchasing goods and services from other countries, So this is a domestic investment

Net Export =X-M
Exports(X)	100
Imports(M)	150
Net Export =X-M	-50

 Net Export is negative; this implies that domestic investment is more than the foreign investment by an amount of “50”.Therefore there is a deficit in current account [CAD]

(c) Relationship between national saving and current account balance

If the national investment of a country exceeds the national savings of that country then there will be a deficit in the current account. On the other hand if the national savings of a country exceeds the national investment of that country then there will be a surplus in the current account.

Explanation of balance of payment must be balanced

The Balance of Payment is prepared on the basis of the principle of the double-entry book-keeping system. The BOP account of a nation shows a credit balance for a transaction which leads to an increase to a receipt from the rest of the world. The BOP account of a nation shows a debit balance for a transaction which leads to an increase in payment to the rest of the world. The difference between the total of debit side and total of credit side is balanced by incorporating an adjustment factor [when in reality the difference exists] and that is why it is said that balance of payment must be balanced Bussiere,(2013).

(a) Description of the macroeconomic indicators 

Macroeconomic indicator that typically begins to change its direction of growth before an economy enters a new business cycle phase is defined as “leading Indicators”. The examples of this kind of indicators are “average work done”, “new businesses formed”, “new building permits”

The economic indicators that typically switches into a new phase at around the same time as the business cycle switches into a new phase is defined as “Coincident indicators” Pilinkus, (2010). The examples of this kind of indicators are “unemployment rates”, “household income”, “industrial production”, ”retail sales”

GDP, NDP, and GNP calculations

(b)Description of GDP gap(positive and negative) and impact on unemployment

The GDP gap can be defined as the difference between the Potential Real GDP & the Actual Real GDP

GDP Gap = Potential Real GDP – Actual Real GDP

When the actual real GDP is more than the full employment real GDP or full capital real GDP then the GDP gap will be positive as it mens that then the actual output will be more than the full capacity output Daly & Hobijn,(2010).

If Actual GDP less than potential GDP then the current level of employment is at a level less than full employment level and in other words substantial unemployment is present in the economy

(C) Impact of investing national output for stimulating the growth:

The argument of the prominent economists that investment of a large share of national output may lead to the rapid generation of productivity and ruse in the standard of living of the people must be supported as the output of an economy increases with the growth of Land, Labor and Capital over time and output or real GDP per unit of labor increases with the increase in capital invested per unit of labor which is decided by the amount of available household savings. According to growth model of “Solow”, the long term growth can be achieved by the economy with the increase in consumption, saving, capital, labour and technological change. Increase in consumption leads to increase in production and savings, which intern leads to increase in investment on capital. As capital investment per unit of labour increases in combination with the improved external technology, the economy manages to attain rapid growth and enhancement in the standard of living of the overall society.

(a) Relation between full-employment rate of unemployment & frictional, structural, seasonal and cyclical unemployment

The Full employment level refers to the natural level of unemployment and thus do not refers to the zero level of unemployment. The full employment level refers that there can exits some amount of frictional [the unemployment that arise when a person voluntarily remains unemployed for the purpose of job switch] and seasonal unemployment[the unemployment that arise due to the recurring changes in the seasonal demand for employees in some specific industries like resort worker hiring industry, construction workers hiring industry ]; but the Full employment level  does  not accepts the presence of structural unemployment [This unemployment arise due to the  mismatch between the available skills and the skills needed  for the available job opportunities]and cyclical  unemployment[caused by the reduction in job opportunities in the recession phase of the business cycle] Eriksson & Rooth, (2014).

Current account balance and its impact on national savings

(b)Relation between Unemployment rate & Underemployment rate

Unemployment rate =Unemployed Persons/Total labour force=6.5%

Unemployment rate =Unemployed Persons/Total labour force=5.5%

Decrease in Unemployment rate from 6.5% to 5.5% indicates that now 1% less proportion of the total labour force is unemployed.

Underemployment rate =Underemployed Persons/Total labour force=14%

Underemployment rate =Underemployed Persons/Total labour force=12%

Decrease in Underemployment rate from 14% to 12% indicates that now 2% less proportion of the total labour force is underemployed Page et al.,(2013).

It has been assumed that this 2% proportion of the labour force has left the current job band looking for better job where they will not be considered as unemployed. Therefore there is 2% increase in the frictional unemployment. So as a whole there will be 1% increase in unemployment.

(a)Slope of aggregate demand curve 

The demand curve for an individual product is the representation of the price or cost of a product along with the quantity demanded. As per the law of demand, the quantity demanded for a normal product increases as price decreases and vice versa. Thus the demand curve for a product represents the negative relationship between the price and quantity demanded and therefore appears as downward slopping curve. 

The aggregate demand curve being a summation of the price and quantity demanded for several products or say aggregate output or product in the economy and represents the same negative relation between the costs of acquiring the output and quantity demanded and thus is negatively sloped. The only difference is that the aggregate demand curve is slightly flatter than the demand curves for individual products.

(b)Shifting of Aggregate Demand (AD) curves

Consumers expect an economic upturn.The aggregate demand of the economy will rise and the aggregate demand curve will shift in parallel manner in outward direction as defined by the arrow sign

A new government is elected and business and business managers become more uncertain about future:The aggregate demand of the economy will decrease and the aggregate demand curve will shift in parallel manner in inward direction as defined by the arrow sign

Decrease in government spendingWith decrease in government spending there will be reduction of money supply in the economy and there will be reduction in aggregated demand due to the decrees in disposable income; therefore the demand curve will shift in an inward direction Kilian& Park, (2009).Impact of exchange rate appreciationIf the exchange rate of Australia appreciates, the value of the Australian dollar increases in comparison to international currencies like dollar. So import of foreign goods will be cheaper and this will cause a fall in domestic demand and inward shift in the demand curve.

Macroeconomic indicators and their relation to business cycle phases

(c)Shift of aggregate supply (SS) curve

Impact of rise in oil price:

 

The rise in oil price will lead to the increase in the cost of manufacturing and distribution of the domestic products .As result the domestic products will be costly. The rise in price of products will decrease the demand for products and in anticipation of the fall in demand the producers will reduce the supply of products in the economy which will lead to an upward shift of the supply curve in a parallel manner as directed by the arrow sign.Impact of fall in wage demand 

With the fall in expected wage to be demanded the production cost will be lower and the price of products will be reduced which is expected to increase the demand for products .According to law of demand and in expectation of the rise in demand the producers’ will raise the aggregate supply of output in the economy and that will cause a downward shift of the supply curve in a parallel manner as directed by the arrow sign Ruttan & Thirtle, (2014).

Impact of rise in electricity prices:

 The rise in the cost of electricity will increase the cost of production and prices of the output and consequently there will be a fall in aggregate demand for the output and thus the suppliers will reduce the supply of output in the economy which will lead to an upward shift of the supply curve in a parallel manner as directed by the arrow sign 

Impact of abolition of business regulation:

The abolition of the business regulations which had been quite expensive for firms to comply with the suppliers will be able to produce and supply more output at a low cost in the economy and thus the aggregate supply of output will rise in the economy. This will lead to a downward shift of the supply curve in a parallel manner as directed by the arrow sign

Reference:

Balli, F., Louis, R. J., & Osman, M. (2010). Income smoothing and foreign asset holdings. Journal of Economics and Finance, 34(1), 23-29.

Bussiere, M. (2013). Balance of payment crises in emerging markets: how early were the ‘early’warning signals?. Applied Economics, 45(12), 1601-1623.

Costanza, R., Hart, M., Talberth, J., & Posner, S. (2009). Beyond GDP: The need for new measures of progress. The pardee papers.

Daly, M., & Hobijn, B. (2010). Okun’s Law and the Unemployment Surprise of 2009. FRBSF Economic Letter, 7.

Eriksson, S., & Rooth, D. O. (2014). Do employers use unemployment as a sorting criterion when hiring? Evidence from a field experiment. American Economic Review, 104(3), 1014-39.

Kilian, L., & Park, C. (2009). The impact of oil price shocks on the US stock market. International Economic Review, 50(4), 1267-1287.

Musu, I., & Siniscalco, D. (Eds.). (2012). National accounts and the environment (Vol. 6). Springer Science & Business Media.

Page, A., Milner, A., Morrell, S., & Taylor, R. (2013). The role of under-employment and unemployment in recent birth cohort effects in Australian suicide. Social science & medicine, 93, 155-162.

Pilinkus, D. (2010). Macroeconomic indicators and their impact on stock market performance in the short and long run: the case of the Baltic States. Technological and Economic Development of Economy, 16(2), 291-304.

Ruttan, V., & Thirtle, C. (2014). The role of demand and supply in the generation and diffusion of technical change(Vol. 21). Routledge.