Economic Policymakers - Essay Example

The nominal GDP has grown by 5%. Now we look at three scenarios, one where inflation is 5% (country like the UK), the second where inflation is 1% (country like the US), and the third where inflation is 10% (developing countries like India or China). If the economic policymakers were to consider only nominal GDP, all three policymakers might consider similar fiscal policies. However, by looking at the real GDP, we can see that even though the nominal growth of developing countries is higher, it is still lower than the inflation rate and the real GDP has dropped.

The goal of economic policymakers so has has unemployment, stable prices and to stimulate growth. They have two sets of tools for this objective:

• Fiscal policy – Government spending and Taxation
• Monetary policy – Discount rate, Bank reserve ratio, and Open market operations

So, the assumption made about what policymakers want to know when considering Real GDP more meaningful is the following:

1. Are economic policies creating a real increase in the output?
2. How much real demand is being created by government spending and taxation policy?
3. Is the monetary policy able to drive growth at constant prices?

1. Why is GDP inadequate as a measure of social welfare? Can you think of any ways to make GDP a better measure of social welfare?

GDP simply adds up all the products and services that are bought and sold. It makes no distinction between transactions that ass to the social welfare and those that diminish it. GDP assumes that all monetary transactions add to well-being without separating cost from benefit. For example, as a result of the recent earthquake and Tsunami in Japan, GDP would not take into account the loss caused by it but would add up the cost spent in bringing things back to normal. Also, activities that are negative for the social welfare are added up in GDP – like lawyer fees in divorces or property damage and medical expenses due to crime. Further, GDP does not take into account some of the most important social welfare work that happens in our everyday lives – childcare, DIY home repairs, or even voluntary work. As an example of the ambiguity of GDP, if we hire someone to do the home repairs, GDP adds the income but if we do it ourselves, the DIY repair goes “unnoticed” in the GDP.  

To make GDP a better measure of social welfare, we could represent GDPs like the balance sheet of a company showing separately the assets (monetary transactions that lead to social welfare and development) and the liabilities (monetary transactions that hurt social welfare or those that have been made to bring back to normal after a disaster). The net of these assets and liabilities would then be a good indicator of how much actual social welfare has occurred in the country or over time.

4. Compute real GDP for each year. 1987 is the base year. Show your work.

Year

Nominal GDP

GDP deflator

Real GDP

1989

5 244

1,08

4 856

1990

5 514

1,13

4 880

1991

5 672

1,17

4 848

Real GDP in Year n =           Nominal GDP in Year n 

GDP Deflator for that year

Real GDP in 1989 = 5 244 / 1.08 = 4 856

Real GDP in 1990 = 5 514 / 1.13 = 4 880

Real GDP in 1991 = 5 672 / 1.17 = 4 848

1. In your own words, but accurately, characterize the performance of the U.S. economy over the period 1989–199To

To characterize the performance of the economy from 1989 -to 1991, we can use the same data for some more calculations - the growth rates of GDP and Inflation.

Year

Nominal GDP

GDP deflator

Real GDP

Nominal GDP growth

Real GDP Growth

Inflation

1989

5244

1,08

4856

-

-

-

1990

5514

1,13

4880

4.9%

0,5%

4,4%

1991

5672

1,17

4848

2.8%

-0,7%

3,4%

Nominal GDP growth for Year n =   (Nominal GDP in Year n  –  Nominal GDP in Year n-1)

Real GDP in year n-1

Real GDP growth for Year n =          (Real GDP in Year n  –  Real GDP in Year n-1)

Real GDP in year n-1

Inflation in Year n =                          (GDP deflator in Year n  –  GDP deflator in Year n-1)

                                                           GDP deflator in Year n-1

Based on the above information, it seems that while the Nominal GDP grew at 4.9% in 1990, the Real GDP growth was only 0.5% due to high inflation in 1991, the Nominal GDP growth reduced further to 2.8% while the Real GDP saw a decline of -0.7%. At the same time, the inflation rate was reduced from 4.4% to 3.4% during this period. This shows that the economic slowdown in the US had begun and it only got worse during 1990-1991 which was a period of recession in the US, with the real GDP showing a downward trend.