Fundamentals of Micro and Macroeconomics: Calculating Gross Domestic Product - Assignment Example

Macro and Microeconomics a) Demand of a good or service is the quantity that the potential consumersare willing and able to purchase at a particular price. Various factors affect the quantity of goods that may be demanded in the market. In the case of Buenos Aires, the factor that determines the quantity demanded is the expected changes in the prices. When buyers expect the price of the commodity to increase, they will increase the quantity of their stock now in order to avoid the negative impact on the price increases (Hansen 168). At the same time, the increase in demand will stimulate the quantity supplied in the market. The producers will therefore increase the quantity of supply to match the increased demand and this translates in a new equilibrium quantity and price. b) There are instances in which the price might not affect the quantity of goods supplied by the producers. Where the increased demand arising from the expected future increase in prices is accompanied by commensurate increase in the quantity supplied then no changes in price will be realized. An outward shift in the supply curve will lead to maintenance of the price levels. Figure 1 From the above figure, it can be shown that the initial equilibrium quantity is Q0 and the original price is P0. Because of the expected future increases in price, the demand curve shifts from D0D0 to D1D1 making the price increases. Because of the rise in prices, suppliers will be stimulated to increase the quantity of their supplies hence lowering the prices at the market. The shift of the supply curve from S0S0 to S1S1 changes the equilibrium quantity from Q0 to Q1 without an increase in the prices of the commodity. c) The three approaches in the determination of the GDP often results in different values. Whereas the income approach to the determination of GDP focuses on the totals of the income earned by the providers of factors of production, the expenditure approach sums the amount paid for final goods and services by the households and the government (Hansen 167). There are several reasons that cause these differences. First, the problem in double entry could have significantly caused the varying values. By including intermediate goods, the GDP value could have been inflated. At the same time, the income approach to measuring the GDP might have omitted some of the income earned by the providers of factors of production. For example, the approach is prone of omitting income of the private sector due to lack of records. Some of the income of homemakers and even income from illegal activities are always omitted thereby making the total of the approach slightly lower than the expenditure approach. Nonetheless, the conflicting totals might have been caused by the calculation errors. Wrong additions and inclusion of values in the calculation of the GDP always impairs the accuracy of the GDP. Economists can correct the above causes in difference in the level of GDP using the two approaches. To begin with, only the expenditure on final goods and services should be used in the expenditure approach must be used if the problem of double of entry is to be avoided. Secondly, the income approach should also incorporate all the incomes of the suppliers’ of the factors of production if a correct value of GDP is to be arrived at. The income from illegal activities and those from the informal sectors of the economy like salaries of homemakers should be included. Moreover, the methods from the two approaches should be harmonized to reach an amicable value. d) If the GDP grows at the rate of 7%, then to determine how long the GDP will double we compound the current GDP at the growth rate, Assume the current GDP is $1000 If the GDP has to double, then the GDP should be $2000 Time for GDP to double(T), 1000 (1+0.07)^n=2000 Therefore 1.07^n=2 T= = 10.24 years The growth in the GDP can sometimes fail to lead in an improvement in the standards of living. This is one of the reasons as to why the use of GDP is criticized as a way of measuring real growth. One of the reason as to why GDP might not translate into improvements in the living standards is because of the inflation effect(Hansen 173). Inflation would result into an increase into the value of goods without an increase in the quantity of goods produced. It therefore means that the value of GDP is not appropriate way of determining the improvement in the living standards. The GDP value can also fail to show improvements in the living standards because the investments could have been on sectors of the economy that does not really influence the lives of the individuals. For instance, the increase in GDP on the tourism sector might not translate to the individuals in the economy. Notwithstanding, GDP value might not be evenly spread among the nationals of the economy. In cases where only a particular class of individuals benefits from the increase in the GDP level, the net impact would not be felt by the citizens hence making GDP inappropriate for measuring the living standards. e) One of the economic problems that face the countries is the control of the rate in the unemployment level. In an economy where the unemployment rate is low, there is likelihood that the standards of living would be low. Contrary to this conventional belief, there are instances that the reduction in the unemployment rate might not reduce the level of the standards of living. One reason for this could be reduction in the wage rate. This therefore reduces the disposable income and reduces the level of cconsumption making the living standards reduce. For example where the average wage level is $50 dollars and 90 people are employed the disposable income will be 90*20= $1800. On the other hand where the unemployment level reduces with a corresponding decrease in the average wage rate, the disposable income will be the same i.e 100*15=$1500. This implies that where 100 people are employed at a wage rate of $15 then the standards of living will decline. At the same time, the level of living standards may be lowered because of the poor working standards. From the above calculations, it is evident that the living standards might decline with the decrease in the unemployment level because of the significant fall in wage level. The total disposable income in the economy will thus be lower than the initial level where more people were unemployed. Further, the increased people who are employed may not increase the level of output if other factors of production were fully put into production. The understanding of economic variables is crucial in the determination of whether the living standards have improved or whether the economic problems have been transferred to other economic sectors. f) In the income approach of determining the GDP, the income earned by the various factors of production is summed. It must be noted that only the final income are included and any transfers must not be counted more than once. The formula for calculating GDP by the use of this approach is given by GDP= Wages + Rent+ Net interest+ Gross profit (corporate and proprietors profit) + Depreciation+ Indirect business tax Therefore, the GDP of Snookie will be given by the sum of all the income earned by the owners of the factors of production as follows. Item Amount in $(Billions) Employee compensation 6200 Net interest 850 Depreciation 800 Corporate profit 1000 Proprietor’s income 1000 Rental income 300 Indirect business tax 500 Total GDP 10650 The statistical discrepancy can either be added or subtracted to the total GDP depending on the nature. Where the discrepancy increases the GDP then the value will be deducted and where the discrepancy reduces the actual value of GDP, it will be added to the gross figure determined above. g) The rate of unemployment is the proportion of the labor force that is willing and is actively engaged in the job search but is unable to secure jobs at the prevailing wage rates (Hansen 175). The rate of unemployment in any country must be closely monitored and analyzed to determine its performance. In this calculation, the total number of people in the labor force to arrive at thye percentage divides the total number of unemployed people. Only those actively willing and looking for opportunities are considered. Total number of labor force= Total population- Number in jail- Youngsters -Retired population The table determines the total number of labor force. Category Number Total population 1000 Less jailed 50 Less youngsters 200 retired 50 Total number of labor force 700 Unemployed population= Total labor force – Employed population Category Number Total no. of labor force 700 Less housewives and house husbands 100 Full time jobbers 400 Part time jobbers 100 No. of people looking for jobs 100 Unemployment rate= This will be calculated as == 14.29% If 50 people with part time jobs move to another state, then the total work force will reduce by 50 i.e. the total labor force will be 650. New Unemployed rate in Tiny town = =15.38 If again, 5 of the unemployed move to another state, then the number of people seeking for jobs will reduce. Number of people looking for jobs=100 - 5=95 Total population in the labor force= 650 - 5=645 Unemployment rate= ==14.73 h) The cold weather during winter poses a challenge to everyone on the way to warm their homes and houses. In the pursuit of the same, there are players who benefit during the season and those who lose their returns on equal measure. On the first side, the energy businesses stands to realize increases in profits as residents will use either coal or electricity to warm their environments and body. The second beneficiaries are the suppliers of jackets warm clothing that are needed to shield the body from the cold and dangerous weather condition. During this period, their sales turnover increases by many folds and this is equally translated on the profits of the businesses. In addition, the skiing and skating ventures make additional profits and returns at such seasons of the year. It is at this time that the tourists in such areas get the ample time to learn and to enjoy such experiences. On the contrary, the tourist sector of the economy is bound to realize negative returns by the virtue that tourists avoid such destinations. Those from other parts of the worlds may fear touring this area due to the risk of contracting diseases caused by the adverse weather condition. Equally affected are the hotels owners and tourist guides who will experience seasonal unemployment. The low rates that are offered in hotels during such periods because of the low demand deflate the profit margin of the businesses. In conclusion, the understanding of the economy and the variables that contribute to the growth of the GDP are of importance to the economic players. The government through its departments and bodies must ensure a trade-off that promotes the interests of her citizens. The economic policies should improve the standard of living. Constant monitoring of the economic forces is therefore cardinal in good and positive management of any state. Work Cited Hansen, Bent. The Economic Theory of Fiscal Policy. London: Allen & Unwin, 2001. Print. Read More