Question One
National income accounts provide the framework summarizing and categorizing productive activities within a given time period. Simply put, it provides a criterion for measuring the flow of earnings of individuals through the process of producing goods and services. Since national income accounts are solely based on production, they are responsible for giving a reflection of the aggregate level of output. However, scholars and economic analysts have argued that National Income accounts have several limitations when it comes to measuring the overall level of welfare in the economy (Karl-Gustav, 2006).
First, National Income accounts ignore household production or near-market activities such as childcare, unpaid cleaning, cooking, and other household activities (Krueger, et al., 2007). Such activities are crucial to the economy because they produce services that could be purchased at the market. Second, measurement errors are rife in measures of national income because many factors are omitted during its calculation. Factors that are omitted include unrecorded sales, illegal sale of drugs, prostitution, jobs involving cash payments, untaxed under-the-counter sales, among other illegal activities within the black market (Krueger, et al., 2007).
Third, National Income accounts exclude the value of leisure and social activities, which are critical in influencing the effects of subjective well-being.
Third, National income accounts are poor measures of welfare because all economic activities are measure in form prices. Equally, price distortions usually occur in imperfectly competitive markets. A decline in welfare could have been caused by an increase in the overall level of economic activity. For instance, situations having a negative impact on the people could have forced individuals to increase their level of spending. In this case, it is possible to miss consumer surplus, which often occurs in market transactions because all prices depend on marginal valuations of perfectly competitive markets. A good example is precious minerals such as diamonds, which are counted as being valuable that basic needs such as water even though it is difficult to explain how precious metals contribute in improving the well-being of the society. Other factors related to the measurement of welfare include the failure to include items that ameliorate the quality of the living environment.
Finally yet important, undesirable production externalities can be used to overstate the welfare standards in national income accounting. These factors include air pollution, traffic congestions, and divergence between social and private costs. Karl-Gustave (2006) argues that national income accounting operates under the principle of double entry thereby failing to provide a clear reflection of pure and sound as far as bookkeeping is concerned. This provides a room for misrepresentation of items that must be included in consumption while the amount spent by the government is allocated a huge role. For this reason, policy decisions made by the government mainly depend on the calculation of GDP, and such decisions directly affect the well-being of citizens.
Question Two
There is no doubt that hyperinflation is one of the most worrying issue in the process of economic analysis for given the level of future uncertainties it brings. Not only do the general price levels increase within an economy but also hyperinflation inflation leads to the currency losing its value. The most worrisome issue is that an inflationary cycle occurs without showing a tendency of returning to the original equilibrium. The decreasing value of a currency can cause a nation to print more currency thereby leading to an increased level of currency devaluation. A good example is the 2008 hyperinflation that was seen in Zimbabwe. By mid-November 2008, inflation had soared so badly such that it had reached a high monthly rate of 79.6 billion percent (Hanke, 2008).
There are several problems associated with hyperinflation, the first being the worsening of wages in the short run. In such a situation, the level of wages paid to workers in insufficient to satisfy the declining currency purchasing power. Other than the wage rate, it can cause a looming crisis in specific industries where certainty has been guaranteed. For instance, customers in the banking sector are often assured allocated specific repayment rates that cannot be adjusted to reflect hyperinflation. This leads to low value for money collected by lending institutions as compared to the value of money it gave to borrowers.
Banks and monetary institutions might run into serious debts and bankruptcy issues thereby calling for urgent measures to be undertaken by the government. This results to monetization of debts whereby the government gets involved in the repayment of debts to bail out key financial institutions. Even though the government can create more money, it is difficult for it to create purchasing power hence worsening the value of the cash already existing in the market. Other devastating effects to the economy other than the elimination of purchasing power parity of public and private savings includes hoarding of assets, monetary base outflow, extreme consumption, and makes anathematic to investment activities.
Stopping inflation calls for the implementation of a number of policy factors aimed at curtailing the further spread of inflation. First, the adoption of a new base unit can be used to minimize the spread of hyperinflation in the short run. Second, the adoption of a new monetary policy that inhibits customers from borrowing money will lead to an increase in the value of the currency (Evans 2009). Such monetary policies include increasing the rate of interest.
Dollarization is another measure that can be used to stop inflation. This entails the replacement of the entire of local reserve bank by injecting the amount of dollars in circulation. Dollars can account for 55 to 70 percent while the remaining percentage can comprise of money stock in euro or sterling pounds. Dollarization can be done in three forms that include unofficial dollarization, semiofficial dollarization, and official dollarization (Hanke, 2008). Official dollarization involves a situation where foreign currencies are dominant in status as the legal tender of the affected economy. Semiofficial dollarization occurs where foreign currencies can dominate bank deposits but assume a secondary role in other transactions such as payment of wages and ;ocal purchases. Lastly, unofficial dollarization entails a situation where most of the financial wealth is held in form of foreign assets even when the foreign currency is not used as the legal tender.
Question three
Primarily unemployment occurs when people in a functioning economy are searching for job opportunities, but fail to secure such opportunities. Economist divides unemployment into different types comprising of;
i. Frictional unemployment
This type of unemployment often occurs when employees shift from one form of employment to the other. Many at times, people shift from one job to another in search for increased or better wages. On the other hand, change in career may force individuals to shift from their current employment sectors. Speaking of change in career, this primarily refers to change in profession, which might occur because of personal interests and this makes people shift to different jobs that suit their interests. Other reasons that cause frictional unemployment are the entry into the workforce by employees mainly from learning institutions.
ii. Structural unemployment
Structural unemployment occurs when employment opportunities in the market are less than the number of unemployed individuals. Often, instances of structural unemployment occur in cases where the unemployed possess skills that are not in demand in the labor market. As such, employers are less likely to recruit individuals with skills that are not essential in their employment sector. Advancement in technology further is another cause of structural unemployment. Precisely, use of technology leads to reduced demand for different employees, which leads to unemployment (Tucker, 2010). On the other hand, changes in consumer preferences for certain products can lead to collapse of firms producing such products, which leads to loss of employment for persons working in these firms.
iii. Cynical unemployment
This type of unemployment depends on the rate of economic growth. Therefore, when the rate of economic growth is lower, the unemployment rate is higher, whereas, when the economic rate is higher, the unemployment rates are lower. Notably, during periods of low economic growth, the production rate is lower and production companies opt to cut production costs by retrenching its employees (Tucker, 2010). On the contrary, periods of high economic growth lead to increase in production; hence need for more employees.
Government programs to combat each type of unemployment
In order to combat frictional unemployment, the government can develop job exchange program initiatives, which facilitate shift by individuals from one form of employment to another. Such initiatives can be supplemented by the imposition of strict regulations that require justifications on the need to shift from one employment to another. On the other hand, the government can combat structural unemployment by developing programs that create awareness amongst the populations of the skills that are highly in demand in the job markets. This will increase the number of people with needed skills in the market (Tucker, 2010); thus increasing employment. With regard to cynical unemployment, the government should develop programs that cushion the country from the economic downfall. An example of such programs includes creation of reserves for basic commodities in times of increase availability. This will help control price of basic commodity goods and limit rise in the prices of these commodities times of recession. In fact, the government can devise price control policies that facilitate economic growth and limit the occurrence of cynical unemployment.
Evans, L. (2009). “A witches' dance of numbers": Fictional portrayals of business and
accounting transactions at a time of crisis. Accounting, Auditing & Accountability
Journal, 22 (2): 169 – 199
Hanke, S. H. (2008). Zimbabwe: From Hyperinflation to Growth. Center for Global
Liberty & Prosperity
Karl-Gustav H., (2006). Improving national accounts. Kybernetes, 35 (1): 45 – 64
Krueger, A. B., et al. (2007). National Time Accounting: The Currency of Life. Princeton
University
Tucker, I. (2010). Macroeconomics for today. London: Cengage Learning.
