Question 1
Gross domestic product (GDP) is a phrase or term that is often used in economics. It essentially refers to the market value of the total final goods, product or services that are produced in a certain nation within a given period of time (Bouman n.p). A final good generally refers to an item that is sold to the final user. This is the usually the final consumer, but it can also refer to firm making investment, government or even a foreign entity. A good is generally classed as a final good when it has reached the ultimate or final sale point in a given year. A perfect example would be packet of milk or a loaf of bread bought by a consumer from the local convenience store. Intermediate goods are, on the other hand, quite different from final goods. Rather than being sold to the final consumer, the intermediate good is produced by one firm and bought by another firm that uses this product to make something entirely different or to uses it as a component of another product that is now the final good. Therefore, intermediate goods refer to the goods that are produced within a certain year, and that are used in the production or the processing of other products. A perfect example would be wheat that is sold to a baker who uses it to make the final product; bread. Another example would be cotton sold to another manufacturer who then uses it to make cloth. Therefore, in the intermediary phase, the good has not reached its final point of use. It is important to make a proper distinction between a final goods and intermediate goods because when it comes to the GDP, only the final goods are included (Chowdhury 54). Intermediate goods should be excluded so as to avoid double counting. For instance, it would be inaccurate to count the cotton that went into the manufacture of cloth as well as the clothes themselves as this would entail double counting the cotton- once as cotton and once as a component of the cloth.
Question 2
Government expenditure is the largest single category of GDP- False
Government expenditure is not the largest single category of GDP. It is rather consumption that is largest category of GDP (Chowdhury 55). The private consumption category includes all the goods and services that are bought by households. These include items such as gas, food, appliances, vehicles, non- durable as well as durable goods. The amount in this category is however subject to fluctuations depending on taxes, income, spending habits and saving. This category amounts to about two-thirds of the total GDP. Government expenditure is the second largest and accounts for about 20% of the GDP (Chowdhury 55). This category includes all the expenditures by the state, federal and local governments on goods and services. These many include teacher’s salaries, military goods and so on.
Nominal GDP uses current market prices and real GDP measures GDP using base-year prices- True
Nominal GDP is usually calculated using the current market prices. This means that the nominal GDP usually includes all the changes in the market prices that have occurred in a given year due to either deflation or inflation (Chowdhury 55). Inflation generally refers to an increase in overall prices levels of goods and commodities. On the other hand, deflation refers to the overall fall in the prices of goods and commodities. However, in order to make abstractions from the changes on the overall price level, real GDP, which is another measure of GDP, is often used. Unlike the nominal GDP, this real GDP is often evaluated using base-year prices (Bouman n.p). A base year is usually chosen, and all calculations are done with reference to this base year.
GDP increases if you purchase General Motors stock- False
GDP does not increase if one buys stock. This is because GDP does not include the purchase of financial products because they are not classed as final goods. Buying a financial product is normally considered to be equivalent to saving. It is not considered to be an investment that would have otherwise been included in the GDP and would have, therefore, added it. If money is essentially converted into services or products, it is considered as an investment. On the other hand, if one buys a bond or a stock, it is essentially a transfer payment and is excluded from the calculation of the GDP. The reason for this is that bonds, as well as stocks, affect overall financial capital which then affects sales and production, which then affect investments. Therefore, bonds and stocks are seen as indirectly affecting GDP. They, therefore, almost resemble intermediate goods and services which are often excluded from the calculation of GDP. Therefore, although these purchases of stock would be conventionally referred to investments, from the real economic viewpoint, they only indirectly contribute to the GDP and should not thus be included in its calculation. Therefore, if an individual buys stocks from General Motors, this would not necessarily lead to an increase of the GDP.
Question 3
The natural rate of unemployment refers to the rate at which an economy’s inflation rate is stabilized and if unemployment decreases due to the expansion of the economy, then the rate of inflation starts accelerating (Johnson and Layard 934). It is essentially the unemployment rate whereby real wages find a free market level. At this rate, the aggregate labor supply is at par with the aggregate labor demand. This rate has three main components. These are frictional unemployment, structural unemployment, and surplus unemployment (Johnson and Layard 938). One factor that affects the natural rate of unemployment is occupation and geographical mobility of labor. If it were possible for workers to have increased mobility, unemployment would be greatly reduced especially the one that is caused by a shift in geographical location or skills mismatch. Another factor affecting the rate of natural unemployment is the labor market flexibility. If things such as minimum wages were done away with as well as restrictions on trade unions removed, labor markets would become more flexible and might even be both willing and able to hire more workers therefore reducing unemployment. The hysteresis hypothesis can also be seen as a factor affecting the natural rate of unemployment. For instance, if unemployment rises due to something such as recession, then it is likely to remain high for a long time because workers become de-skilled and unmotivated and may therefore find it relatively hard to get jobs in the future.
Question 4
Structural employment delays the rate of unemployment recovery than cyclical unemployment. This is because it is associated with a mismatch for the skills possessed by employees and the skills that employers are actually looking for (Groshen and Potter 2). For example, workers have the skills for an industry that is declining, but do not possess the skills appropriate for new and rising industries. Currently, although many firms may have jobs, they cannot, unfortunately, find the appropriate workers. In the same way, workers cannot find appropriate jobs. Sources of mismatch may be related to skills, geography, and demography, and when they are all at work, economic recovery is greatly delayed.
Works Cited
Bouman, John. "Principles of Microeconomics-free fully comprehensive Principles of Microeconomics and Macroeconomics texts." Columbia, Maryland (2011).
Chowdhury, Anis. "Methods Explained: The GDP Implied Deflator." Economic & Labour Market Review (2008): 53-56. Print.
Groshen, Erica L., and Simon Potter. "Has structural change contributed to a jobless recovery?" Current Issues in Economics and Finance 9.8 (2003): 1-7.
Johnson, George E., and Richard Layard. "The natural rate of unemployment: explanation and policy." (1987): 921-999.
