Economics Assignment 2 - Essay Example

One cannot ignore the importance of alleviation of income inequality to achieve long term economic growth. The standard of living of a country is often measured by the per capita GDP. It will not be wise to think GDP per capita to be the measure of personal income. If the economic theories are taken into account, then per capita GDP will be same as per capita GDI (Gross Domestic Income). The goods as well as the services produced in a certain country and brought to the market have some price.

Some experts regard GDP as the price of the total output. The GDP can be calculated in the following ways. Cumulative figure of all income within an economy or the total spending made by all the participating agents within the same economy is referred to as GDP. Both the spending and the income will roughly be the same. It should be kept in king that Gross Domestic product and Gross National product is not the same thing. The market value of the goods as well as services produced within a particular time period by the residents of a particular country is regarded as the GNP.

It allocates the production based on the ownership. Three approaches can be used in order to determine the GDP. They are- the income approach, the product approach and the expenditure approach. The product also called as the output approach sums the total produced within the economy in order to attain the value of GDP. The expenditure approach assumes that the products produced must be bought by someone and so the total value of the product must be matched by the total expenditure of the people in purchasing things (Wesselink, Bakkes, Best, Hinterberger, and Brink, 2007).

The last approach takes into consideration that the value of the products must be equal to the incomes of the factors of production. It determines the value of GDP by calculating the sum of the income of the producers. Inflation rate: Inflation is defined as the continuous or sustained rise in the general level of price. It can also be defined as continuous reduction in the value of money. The movement in the general price level is referred to as inflation. The rise in the price level must continue over longer period than a day, week or a month (Makinen, 2003, p. 2). Some of the factors that lead to inflation are rise in the costs of imported materials, the costs of labour to rise and the high rate of indirect tax from the part of the government.

In cases where the rise in the general price level is caused by increase in the level of wages as well as raw materials are regarded as cost push inflation. With rises in the costs of production the firms tend to raise the prices of the products so that they can gain the same amount of profits. This is a situation of cost push inflation. The cost push inflation is frequent when the level of employment is on the downward sloping curve. If left uncontrolled inflation will move from the initial stage towards the stage that can be harmful.

Therefore it is necessary to control inflation before it gains strength. An inflation of stronger intensity is much difficult to control than the mild one. It should be kept in mind that that it is not possible to control hyperinflation. The changes in the price level of goods and services purchased by the households are measured by Consumer Price Index (CPI). The CPI can be calculated as the ratio of updated cost and price of the base period multiplied by 100. Unemployment rate: Unemployment takes place when people are short of jobs but are actively looking for