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

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The writer of the following assignment "Fundamentals of Micro and Macroeconomics: Calculating Gross Domestic Product" will provide the understanding of the economy and the variables that contribute to the growth of the GDP are of importance to the economic players…
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Fundamentals of Micro and Macroeconomics: Calculating Gross Domestic Product
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Download file to see previous pages 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 number ply curve will lead to maintenance of the price levels. Figure 1 From the above figure, it can be shown that the initial equilibrium a 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 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 to 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 calculation errors. Wrong additions and inclusion of values in the calculation of the GDP always impair the accuracy of the GDP. Economists can correct the above causes in a 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 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.  ...Download file to see next pagesRead More
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