Why does GDP equal aggregate income and also equal aggregate expenditure?The only way to calculate production is by calculating the cost of the factors of products used. The cost of factors used includes wages, rent, and profit which is supposed to equal the aggregate income. Another option to calculate GDP is by calculating the aggregate expenditure because it’s the same as the sum value of consumption expenditure, investment, government expenditure, and exports minus imports, which is the total amount spent buying the production in the market. Therefore, GDP equals aggregate income and also equals aggregate expenditure.
Explain why real GDP might be an unreliable indicator of the standard of living?Real GDP can be an unreliable source of measuring standard of living due to several reasons. The first being that it does not include household production (done by the homeowner), these productions often are important components of people’s work and it’s cancellation creates a huge measurement problem. Real GDP also doesn’t include underground economy (unreported or illegal economy) which is a huge part of the country’s economy in various places in the world. Leisure time’s value is also not included in real GDP even though Leisure time enhances people’s economic welfare. Moreover, environmental damage isn’t included in the real GDP. An economy might appear growing in the Real GDP but in reality it’s at expense of its environment such as eastern European countries.
What distinguishes an unemployed person from one who is not in the labor force?The definition of unemployment: A person who wants to work, able to work, willing to work at the age of work, but doesn’t have a job. This person must have been looking for a job for the previous 4 weeks or waiting from a call back to a job which they have been laid off from or waiting to start a new job within 30 days.A person who is not in the labor force: A person who doesn’t have a job and doesn’t want one.What is the natural unemployment rate?The natural unemployment rate is when no cyclical unemployment exists. When all unemployment is due to frictional or structural factors, the unemployment rate equals the natural unemployment rate. Full employment exists when there is no cyclical unemployment and the unemployment rate equals the natural unemployment rate.What is the CPI and how is it calculated?The CPI is the consumer price = Cost of CPI basket at current prices ÷ Cost of CPI at base-period prices x 100What is the economic growth and how do we calculate this rate?The economic growth is the increase in the inflation-adjusted market value of the services and the goods that are produced by the economy over time. It is measured by measuring the rate of increase in real gross domestic product or real GDP x 100What is the aggregate production function?The aggregate production function shows how total real domestic product (Real GDP) depends on available inputs.
The inputs are: Physical Capital, Labor, Human Capital, Knowledge, Social Infrastructure, The amount of natural resources available in an economy and anything else.Explain the influences on the pace of labor productivity growth?The pace of labor productivity growth is influenced by three factors which are Human Capital Growth, Physical Capital Growth, and Technological advances.Explain the processes that will bring the growth of real GDP per person to stop according toClassical Growth theoryAccording to the Classical Growth Theory, population growth continues at a rapid pace as long as real GDP per person exceeds the subsistence level. With Population Growth, the supply of labor increases lowers real GDP per person. Eventually, real GDP per person equals the subsistence amount at which time economic growth ends.Neoclassical growth theoryAccording to the Neoclassical growth theory, technological growth leads to increased saving so that capital accumulates and real GDP per person grows. When technological growth stops, capital continues to accumulate but diminishing marginal returns drives the return on capital lower and so decreases investment and saving.
Eventually the capital stock stops growing and economic growth stops.New growth theoryAccording to the new growth theory, economic growth will not stop.Distinguish between physical capital and financial capital and give two examples to both.Physical Capital: Tangible assets such as factories and equipment. It also includes inventory and equipment.Financial Capital: Legal Ownership of all physical capital and any asset that can be liquidated into cash.What is distinction between gross investment and net investment?The gross investment is the total expenditure for buying goods over a specific period of time without keeping in mind the depreciation.
Whereas, the Net Investment is the gross investment minus the depreciation.What is the crowding out effect and how does it work?Crowding out describes the idea that large volumes of borrowing by the government, increase the real interest rate, which later on makes the ability for individuals and small companies to obtain loans almost impossible.12. What makes something money? What functions do money perform? Why do you think packs of gum don’t serve as money?Money is any method of payment that is generally accepted.
The dunctions of Money is that they are a medium of exhange, store of value (saving for future consumption), and units of consumption (price tags). A pack of gum doesn’t serve as money as it’s not a generally accepted payment method. What are the main components of money supply?The main components of money supply are M0, M1, and M2. M0 is the currency that’s in the hands of the public such as the deposits of the banks that are held by the central bank, and its cash reserves (The monetary base of the economy). M1 is the currency that is present outside the banks, it might include foreign currency that are needed in domestic transactions and it’s the most liquid money supply.
M2 tries to expand money supply by items like deposits, mutual funds, and transferable foreign currency deposits.At first, in 1980 Botswana’s Economic Growth rate was lower than South Africa where Botswana’s Capital goods were worth 150 Billions and South Africa’s Capital goods were worth 230 Billions. At 2014, the places swapped and South Africa’s Economic Growth rate was lower than Botswana where South Africa’s Capital goods were worth 360 Billions and Butswana’s Capital goods were worth 400 Billions. Small amounts of capital’s investment would substantially raise the worker’s productivity. By Contrast, workers in rich countries have large amounts of capital with which to work, and this partly explains their high productivity.
Catch up effect: Controlling for other variables such as the percentage of GDP devoted to investment, poor countries tend to grow at faster rates than rich countries.In order to increase the productivity, the policies that must be placed are the ones that act as overall incentives for the employees in general. Policies such as; Improving quality and affordability of education and training, Improving access to and quality of health care, and investment in making a new house affordable.Part two: Problem SetThe table lists some national accounts data for the United States in 2008.Calculate the U.
S. GDP in 2008Consumption Expenditure + Investment + Government Expenditure – Net Exports10,000 + 2,000 + 2,800 – 700 = $14,100 BillionExplain the approach (expenditure or income) that you used to calculate the GDP.The expenditure approachThe BLS reported the following data for 2010, Calculate:Unemployment rate.Unemployment rate = Percentage of Labor Force that in unemployed.Labor Force = Sum of people employed and unemployedLabor Force – Employed = Unemployed, Unemployed ÷ Labor Force x 100.153.7M – 139.1M = 14.6M, 14.6M ÷ 153.7M x 100 = 9.5%Labor force participation rate.Labor Force Participation rate = Percentage of working-age population that is in labor force.(153.7M ÷ 237.9M) X 100 = 64.6%Employment to population ratio.Employment to population ratio = Percentage of people of working age who have jobs = Number of people Employed ÷ Working age population x 100 139.1M ÷ 237.9M x 100 = 58.4%