Answer the following questions: Q1. Economists observe that one country's nominal GDP increased...


Answer the following questions:

Q1. Economists observe that one country's nominal GDP increased two tears in a row, but real GDP fell over the same two years. How can this have occurred? Construct a numerical example to illustrate this possibility.

Q2. Suppose you were worried that national income did not adequately take into account the depletion of the stock of fish in the economy. Describe how you would advise the Commerce Department to take this into account in their calculation. Create fictional GDP data for this country to explain how your recommendation would work.

Q3. In Economy A, the government puts on its payroll government employee workers who cannot find jobs for long periods, but these 'employees' do not work. In Economy B, the government does not hire any long-term unemployed workers; instead, it just gives them cash grants. How do the GDP statistics compare between the two otherwise identical economies? Create fictional unemployment data for both these countries and explain how the unemployment rate will be reported.

Q4. The starting salary for a new assistant professor was $35,000 in 2000 and $65,000 in 2015. The value of CPI for 2015 was 164.3 compared to 55.6 in 2000. In which year did a newly hired professor earn more in real terms?

Q5. The table contains fictional unemployment rates around the world in 2010:

Country Percentage (%)
USA 4.3
Spain 12.7
Sweden 6.4
France 11.2
Italy 16.1
United Kingdom 6.0
Netherlands 3.2
Japan 4.9
Australia 7.2

Interpreting World Unemployment Statistics, a student looking at the above table argues that Spain must have very high cyclical unemployment compared to Japan because Spain's unemployment rate is high. Explain why the student may not be correct.

Q6. In a major city, the vacancy rate for an apartment was approximately 15%. Yet, a substantial number of individuals were searching for new apartments. Can you explain why this occurs and bring out its relevance to unemployment?

Gross Domestic Product:

The gross domestic product of an economy is the aggregate of the value of all final goods and services produced in an economy within its domestic political boundary in a given period of time, usually a year.

Answer and Explanation:

Ans. 1.

The nominal value of an economy's gross domestic product does not account for the changes in the price level. An increase in the nominal value of the GDP is not an absolute indicator of growth as the increase could be derived either from an increase in prices, an increase in quantity, or a combination of both. The GDP is considered to have grown only when there is an increase in quantity.

to illustrate the possible given in the question, let us consider an economy that produces tanks. The price of a tank in the first year or the base year is equal to $1,000. The economy produced 1000 tanks in the first year and hence, its GDP can be measured to be equal to $1 million, both in nominal and real terms.

Now, it was found that the nominal GDP increased to $1.5 million in the second year and to $2 million in the first year.

This gives us a picture that the economy has grown But we don't know from the increase in which factor we derived this growth.

What if the price of a tank increased to $2,000 in the second and $3,000 in the third year?

Dividing the nominal GDP of both years with their respective prices of tanks to derive the number of tanks produced, we get 750 tanks for the second year and 666.67 units of tanks respectively.

In real terms, the GDP will be the product of the price of the base year and the quantity produced of the current year.

GDP of Year 2 = $1,000 x 750 = $750,000

GDP of Year 3 = $1,000 x 666.67 = $666,670

It can be concluded from the example above that the real GDP has fallen over the same two years even though the nominal value has increased.

Ans. 2.

Green gross domestic product is an economic variable that factors in the loss of natural resources, environmental degradation, biodiversity loss, and deforestation in the gross domestic product of an economy to provide a comprehensive picture of economic growth after accounting for its environmental consequences.

The depletion of a natural stock can be considered a part of the capital consumption allowance which can be subtracted from the gross domestic product to achieve the net domestic product. To correctly asses the impact, we must convert the depletion into monetary terms.

Let us consider the following values for an economy:

Private consumption: $3 billion

Gross investment: $2 billion

Government Expenditure: $5 billion

Net Exports: -$1 billion

Depletion in the stock of fish: $750 billion

GDP = C + I + G + NX

GDP = $9 billion

NDP = GDP - Depreciation

NDP = $9 billion - $0.75 billion = $8.25 billion

Ans. 3.

The GDP of economy A will be greater than that of economy B. Under the income approach for the calculation of GDP, the national income is calculated as the aggregate of all income generated by the workforce of the economy. In economy A, the government hires the unemployed strata under its payroll even though there is no work for them. This hides their state of unemployment and makes them a constituent of the labor force that is under disguised unemployment. The income they receive, being in the payroll, will be added in national income accounting. Disguised unemployment is not a part of the official unemployment rate as any individual who is underemployed or employed under a part-time opportunity is considered employed. These people on payroll will also be considered employed.

In economy B, however, the case will be different. It is providing cash grants to people who are unemployed. Cash grants are transfer payments that are not considered a part of the gross domestic product as they are merely the redistribution of income without any good or service being exchanged in return. At the same time, its unemployment rate will be much higher as the people will be counted as cyclically unemployed.

Economy A:

Frictional unemployment rate = 1.7%

Structural unemployment rate = 2.1%

Disguised unemployment rate = 2.8%

Total unemployment rate = 1.7% + 2.1% = 3.8%

Economy B:

Frictional unemployment rate = 1.7%

Structural unemployment rate = 2.1%

Cyclical unemployment rate = 2.8%

Total unemployment rate = 1.7% + 2.1% + 2.8% = 6.6%

Ans. 4.

Inflation Rate = {eq}\frac{CPI_{2015} - CPI_{2000}}{CPI_{2000}} {/eq}

Inflation Rate = {eq}1.955 {/eq}

Real Value of income in 2015 = {eq}\frac{\textrm{Nominal Value}}{\textrm{Inflation Rate}} {/eq}

Real Value of income in 2015 = {eq}\frac{65,000}{1.955} = $33,248.1 {/eq}

The newly hired professor earned more in 2000 in real terms.

Ans. 5.

The student may not be correct as an economy's unemployment rate is the aggregate of the frictional, structural, and cyclical unemployment. The first two components are collectively known as the natural rate of unemployment as these types of unemployment cannot be eliminated from an economy. They arise out of market dynamism, technological change, and the movement of the workforce from one industry to another. Cyclical unemployment, on the other hand, is unemployment which is caused due to a reduction in the business activity and hence, is an indicator of resources being idle. In the table given above, even though Spain's unemployment rate of 12.7% far exceeds Japan's unemployment rate of 4.9%, we cannot be certain of the constitution of each type into the aggregate percentage unless given. It is possible that Japan's cyclical unemployment is greater than Spain's cyclical unemployment.

Ans. 6.

The occurrence of this phenomenon can be attributed to an expectations gap between what renters want and what landlords are offering. It is highly likely that a significant chunk of apartment seekers is not able to find the right kind of apartment that suits its taste, expectations, and requirements. Hence, the existence of a high vacancy rate in the presence of seekers. This can be compared with structural unemployment which exists due to the presence of a skill gap between what employers demand and what employees can offer.

Learn more about this topic:

Gross Domestic Product: How to Calculate Real GDP

from Economics 102: Macroeconomics

Chapter 5 / Lesson 6

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