Understanding GDP Calculation, Economic Growth, And Business Cycles

Calculate GDP and GNE

Queston 1.

a). Suppose the following are national accounting data, for a fictitious country for the year 2013. Calculate GDP and the country’s gross national expenditure (GNE) using the expenditure approach.

1 a) GDP Using the Expenditure approach

	Amount (billions of dollars)
Consumer spending Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Household consumption expenditures	3120
Government consumption expenditures	620
Consumption of fixed capital	295
Add Investments
Gross private domestic investment	855
Government investment expenditures	195
Add exports	680
Less Imports	-575
GDP	5190

             GNE = GDP + Net property income from abroad (NPIA)

	Amount (billions of dollars)
Consumer spendings
Household consumption expenditures	3120
Government consumption expenditures	620
Consumption of fixed capital	295
Add Investments
Gross private domestic investment	855
Government investment expenditures	195
Add exports	680
Less Imports	-575
Add Net property income paid overseas	25
GNE	5215

b). Now assume that this country’s nominal GDP has increased by 5.5% for the year 2014. What is the country’s economic growth? Explain your answer.

Gross domestic product incorporates the aggregate worth of ultimate creations that are delivered and sold (and not sold again) in the current year. The development rate of GDP has been around 5.5% for 2014. Obviously, quite a bit of this replicates inflation. The GDP of a country just gathers aggregate yield yet does not recognize gainful exchanges or ruinous exchanges. Economic act can be fortified because of the effect of characteristic debacles or the impact of wrongdoing or combative prosecution (Young, 1987). Cash spent on medicinal expenses because of contamination, the cleanup of ecological devastation or the development of another jail is added to the GDP and considered as adding to the economic development of a nation. The GDP additionally overlooks distribution of income amongst laborers in a nation. Although the GDP may replicate noteworthy development, it is conceivable that just the top pay earners may witness some profit.

The gross domestic product (GDP) has turned into the chief measure of economic action for general nations. It is the assessment of a country’s products and services that it delivers over a time period. The products and services that are calculated are those that the nation really delivers inside its outskirts. The GDP is communicated regarding its individual local economy. in view of the fact that the estimation of GDP is generally utilized and communicated it is imperative to make out the way to figure out the development rate of nominal GDP.

Answer 2.

Shown here are real GDP figures for each of 10 quarters.

Quarterly real GDP (billions of dollars)

Quarter	Real GDP (billions of dollars)	Quarter	Real GDP (billions of dollars)
1	200	6	450
2	300	7	550
3	400	8	650
4	350	9	600
5	300	10	700

a). Plot these data points and identify the two phases of the business cycle.

b). What are some of the consequences of a prolonged decline in real GDP?

c). Is the decline in real GDP from $650 billion to $600 billion a recession?

QUESTION 2

Shown here are real GDP figures for each of 10 quarters.

Quarterly real GDP (billions of dollars)

Quarter	Real GDP (billions of dollars)	Quarter	Real GDP (billions of dollars)
1	200	6	450
2	300	7	550
3	400	8	650
4	350	9	600
5	300	10	700

a). Plot these data points and identify the two phases of the business cycle.

One of the two most important phases of the business cycle is a contraction, which is a time of dilapidated economic movement (i.e. from quarter 3 to quarter 5 and from quarter 8 to quarter 9). The second of the two most important phases of the business cycle is an expansion, which is a episode of growing economic movement (i.e. from quarter 1 to quarter 3, from quarter 5 to quarter 8 and from quarter 9 to quarter 10).

b). What are some of the consequences of a prolonged decline in real GDP?

The capital to labor ratio is an estimation that looks at the measure of capital existing in the economy to the measure of labor. At the point when the measure of capital increases, the estimation of the ratio climbs if the measure of labor does not climb by a comparative sum. At the point when the measure of labor climbs, the estimation of the ratio falls in case the measure of capital does not climb by a comparative sum.

The Impact of Inflation on GDP

Amid a profound recession (at the time of real GDP facing a decline for a few years), the labor constrain for the most part gets to be littler. This has absolutely been the situation amid the late “extraordinary recession.”  In case the labor power contracts, the denominator of the capital to labor ratio gets littler. On the off chance that the denominator gets littler and the numerator (measure of capital) does not descend by a comparable sum, the estimation of the ratio overall will increment. Amid a subsidence, the measure of capital in the economy does not climb as fast as it would in great times. Be that as it may, it ought not fall by a colossal sum on the grounds that capital does not have a tendency to vanish rapidly. Along these lines, in a delayed retreat, we ought to hope to see a continuous decrease in capital and a profound decrease in labor. This implies that the capital to labor ratio will increment in this circumstance.

c). Is the decline in real GDP from $650 billion to $600 billion a recession?

No, because in case of recession, GDP decline is for several yeras

QUESTION 3

a). Clearly distinguish between the causes of demand-pull and cost-push inflation.  

b). Using an AD-AS framework, show what happens to GDP, unemployment and the price level for both
     demand-pull and cost-push inflation.

Answer 3

a). Clearly distinguish between the causes of demand-pull and cost-push inflation.  

The distinction between these two sorts of inflation is established in their reasons. These two have the same impacts (expanding level of price), however they are brought on by diverse things.

Demand-pull inflation is brought on by abundance demand. At the point when the individuals in general get additional cash they find themselves capable to shell out further for products and administrations (if not further merchandise and administrations are delivered). Economists discuss more cash “pursuing” the similar measure of merchandise and services. This reasons deficiencies and costs increase.

Cost-push inflation is brought about by disturbances in supply. These disturbances reason increments in the cost of manufacture. That prompts inflation. Case in point, an ascent in the cost of oil causes essentially all making to end up more lavish.

b). Using an AD-AS framework, show what happens to GDP, unemployment and the price level for both demand-pull and cost-push inflation.

Inflation is the determined hike when all is said in common level of price. Demand pull inflation is a kind where there is an increment in level of price because of the increment in the total demand.

Then again the cost push inflation is when cost level increments because of the increment in the cost of inputs like expansion in pays and resources. The increment in cost of resources reduces the short run total supply which expands the level of price.

Therefore in case there is a shift in the curve for supply rearward we state that inflation is cost push and at the time there is a rightward move in the curve for demand we articulate that its demand-pull inflation.

Phases of the Business Cycle

Question 4

a). How is inflation measured? 

The Consumer Price Index (CPI) plus the succession price index of Domestic Final Demand (DFD) are two significant gauges of inflation inside Australia. They calculate the common rate at which prices transform within Australia. The CPI has been devised like a common gauge of price inflation visage by family units, whereas the DFD price index envelops ultimate acquisitions by industry and government in addition to homes (Rotemberg and Woodford,1997).

b). With inflation there are always losers and winners, explain.

Inflation generates winners as well as losers. Identifying who wins is imperative for comprehension the reasons for which it is in some cases permitted to persevere. At the point when inflation is normal and stable, it is somewhat kindhearted. Individuals and establishments can anticipate it and incorporate it with their choice making. In case inflation is sudden, it makes a win-lose circumstance in the public eye. Inflation hurts more than making a difference. Moneylenders and savers together lose when inflation surpasses desires. Both win investment rates that accept a little rate of inflation, and at time the real rate surpasses the normal rate, savers and moneylenders are hurt. People existing on fixed earnings are likewise hurt by inflation. Amid times of unforeseen inflation, settled salary receivers witness their real earnings decay. Experts on a settled compensation or retirees on an altered benefits lose obtaining power the length of the rate of inflation surpasses the rate at which their boosts in salary (Skidelsky, 2009).

An alternate gathering that advantages from an increment in buyer costs in the short run is makers. At the point when surprising inflation happens, customer costs ascend whereas compensation remunerated to representatives stay generally steady. This permits makers to practice higher benefits for a period until incomes conform to replicate the higher costs purchasers are disbursing.

Borrowers advantage from a general increment in costs or a diminishment in obtaining force. At the point when people, organizations, and governments acquire, it is generally at a settled rate of investment that had a little normal level of inflation incorporated with it. In case higher than anticipated inflation happens, then the real estimation of the borrower’s obligation is lessened.

Question 5

a). Explain how the spending multiplier works in the Keynesian economic model. 

Keynesian model is the outlook that in the short run, particularly amid recessions, profitable yield is unequivocally impacted through total demand (aggregate payments within the economy). within the Keynesian perspective, total demand does not so much matches the dynamic limit of the economy; rather, it is affected through an assemblage of variables and frequently carries on unpredictably, influencing production, job, and inflation (Solow, 1956).

The multiplier impact is abused by governments endeavoring to utilize monetary boost approaches to expand the all-purpose level of economic action. This could be possible in a time of recession or economic vulnerability, while redundancy of labor is elevated and different assets are less-utilized. Expanded spending by government builds the rate of aggregate demand, expanding business movement, which expands salary, which further builds spending and total demand, in a temperate cycle. The thought is that the aggregate increment in production and salary by all gatherings all through the economy might be more prominent than the first addition to government spending, as extra assets are drawn into the round streams of cash spending and business movement through the economy. The presence of unmoving limit and automatic unemployment of labor in the economy can be spoken to as a yield crevice – a contrast between real GDP and potential GDP – and an arrangement of monetary jolt may go for presenting sufficient extra spending, increased by the multiplier, to speed the end of the yield hole.

Consequences of a Prolonged Decline in Real GDP

Keynesian economics depends on government spending to kick off a country and economic development amid languid economic downturns. Like established economists, Keynesians accept the country and economy is comprised of purchaser spending, business venture and government spending (Woodford, 2003). Be that as it may, Keynesian hypothesis directs that administration spending can enhance or take the spot of economic development without shopper spending or business speculation.

b). Explain the differences between the Classical view of aggregate supply and the Keynesian view. Draw diagrams where possible to explain your answer.

The Classical accepted that the level of price would have no impact on genuine yield.

1. Financial operators did not comprise Money Illusion, which could result in monetary specialists to believe that a change in the level of price is really an alteration in the genuine wage and lead to a change in their generation choices.
2. In the short run, generally, wages and costs move together so the genuine compensation does not change. Given that the real compensation does not transform not one or the other does business or yield choices.
3. Hence, the classical economists accepted that the aggregate supply bend was perpendicular.

Diagram: Classical Model

                                    AS

Price

level                                              AD

            Economic Output (Real GDP)

The Keynesian AS Curve has a retrogressive L shape. Until yield achieves complete vocation, the AS bend is leveled; once complete work is arrived at, the AS bend is perpendicular.

Diagram: Keynesian Model

                                                AS

Price

level                                     AD

            Economic Output (Real GDP)

Classical financial hypothesis is established in the idea of a free enterprise monetary business sector. A free enterprise -otherwise called free- -business obliges practically zero legislature intercession. It likewise permits people to act as per their own particular self enthusiasm with respect to monetary choices. This guarantees monetary assets are dispensed by yearnings of people and organizations in the commercial center. Classical financial aspects utilizes the worth hypothesis to focus costs in the monetary business sector. A thing and quality is dead set focused around creation yield, engineering and wages paid to deliver the thing (Lucas, 2004).

Keynesian monetary hypothesis depends on spending and aggregate demand to characterize the financial commercial center. Keynesian economists accept the aggregate demand is regularly affected by open and private choices. Open choices speak to government orgs and regions. Private choices incorporate people and organizations in the financial commercial center. Keynesian financial hypothesis depends vigorously on the way that a country  money related approach can influence an organization and economy (Phelps, 1968).

QUESTION 6

Refer to the table below and determine the following:

a). Complete the consumption schedule and show the consumption and saving schedules graphically. 

b). Determine the MPC and MPS for each change in the income level.

1. a) and b)

Level of output and income (GDP = DI) ($ billion)	Consumption ($ billion)	Saving ($ billion)	MPC= Consumed income/Total Income	MPS= Saved Income/Total Income	Multiplier =1/MPS
240	244	-4	1.02	-0.02	-60.00
260	260	0	1.00	0.00	–
280	276	4	0.99	0.01	70.00
300	292	8	0.97	0.03	37.50
320	308	12	0.96	0.04	26.67
340	324	16	0.95	0.05	21.25
360	340	20	0.94	0.06	18.00
380	356	24	0.94	0.06	15.83
400	372	28	0.93	0.07	14.29

c). Determine the breakeven point.

Break-even level of income is where saving equals zero, so here breakeven point is where income is $260 billion.

d). Explain what happens to the consumption and saving schedules when disposable income increases.

The way to seeing how an ascent in disposable wage influences family spending is to comprehend the idea of the marginal propensity to consumption i.e. devour (MPC). The marginal propensity to devour is the change in customer spending emerging from a change in disposable salary (Krugman, 2009). In case, for instance your disposable wage hikes by £50,000 and you decide to burn through £30,000 of this on additional products and administrations, then the mpc is £30,000/£50000 or 66%. In the event that you picked rather to spend just £25,000 of the increment in pay, then the MPC would be 0.5)

References

Krugman, P. (2009), “How Did Economists Get It so Wrong?”, New York Times Magazine, September 6.

Lucas R. E. Jr. (2004), “My Keynesian Education”, in De Vroey, M. and K. Hoover (eds.), The IS-LM Model: Its Rise, Fall, and Strange Persistence, Duke University Press, pp. 1224.

Phelps, E. (1968), “Money Wage Dynamics and Labour Market Equilibrium”, Journal of Political Economy, vol. 76, pp. 678-711

Rotemberg, J. and M. Woodford (1997), “An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy”, in B. Bernanke and J. Rotemberg (ed.), NBER Macroeconomics Annual 1997, vol. 12, Cambr. (Mass.): pp. 297-346. 

Skidelsky, R. (2009), The Return of the Master, London: Public Affairs.

Solow, R. (1956), “A Contribution to the Theory of Economic Growth”, The Quarterly Journal of Economics, vol. 70, pp. 65-94.

Woodford, M.  (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.

Young, W. (1987), Interpreting Mr. Keynes: The IS-LM Enigma, Cambridge: Polite Press.