Some Macroeconomic Issues - Essay Example

Macroeconomic Short Answer Questions Affiliation: 2 Suppose the consumption of agood entails rather sizable spillover benefits. How might the resulting misallocation of resources be corrected? Spillover benefits refer to both costs and/or benefits that individuals or groups of people reap through the production or consumption of goods and serves, although they are these person(s) do not take part in decisions that aid the process of production or consumption. These costs and benefits result from both over or under-consumption of goods and services and over or underproduction of goods and services (Gupta, Mandal & Gupta, 2008). As a result, misallocation of resources occurs. In order to correct the misallocation of resources, the source of the costs or the benefits need to be identified. That is, if it is taking place on the production side or the consumption side. Where there spillover benefits occur as a result of production, there is either overproduction or underproduction. In case of underproduction, there is need to boost production and this can be achieved through provision of subsidies in order to encourage firms to produce more. In case of overproduction, the firms’ potential is high and resources available for production meet an output that exceeds the actual demand. To correct this, the firms would have to be taxed more in order to make the production process expensive, bringing down the level of produced output in the firms. 1.3 Name a good, the consumption of which is accompanied by spillover benefits. Public television Access to public television is not prohibited to any individual. All those who consume the benefits that come with the good have not necessarily paid for it. On the same note, if there are costs needed for upgrading or improved the premises form where the television is watched from, not every person will take part in that initiative. In this case, where there are costs or benefits attached to that good, there are consumers who do not take part in any activity that pertains to the provision of that good, whether they enjoy it or not. 1.4 Explain the difference between government expenditures for goods and services and transfer payments. Give examples of expenditures which fall into each of the two categories. Government expenditure for goods and services is defined by the level of government spending on public goods and services. The government provides to the society goods and services that cannot be provided through the market mechanism sue to problems of externalities. Goods and services bought by the government for to benefit the society as well as government investments in the various sectors of the economy constitute government expenditure. Government expenditure is financed by taxes, returns on government investments, revenues from state owned enterprises, donations and borrowing from individuals, groups of people, financial institutions, Central Bank and from other countries (Gupta, Mandal & Gupta, 2008). Examples of government expenditures include: financing healthcare and education, provision of security, street lighting and construction of roads among others. Transfer payments are payments made by the government to individuals or groups of people in a given country. In most cases, transfer payments are cash payments from the government to specific citizens of a country. Examples include: compensation for unemployment, payments to the aged people, payments made to the disabled, social securities among others. Transfer payments are primarily financed by domestic finances and in most cases such finances are those collected from citizens of the country whose government makes the payments. 1.5 What are the advantages and disadvantages associated with the corporate form of business enterprise? Explain. Corporate forms of business enterprises are business enterprises that must be registered before they began operations. There are rules, regulations and laws that govern them. A corporate form of business enterprise has the following advantages: Legal framework A corporate business enterprise is established under a specific legal framework where laws governing the operations and functioning of the enterprise are outlined. The activities of the enterprise are monitored and therefore such an enterprise is recognized by law. This is important due to the fact that legal suits can be filed by the enterprise within the provisions of the law. Financing Sources of finances for such an enterprise are broad. Those that require a registered business enterprise are at the disposal of such an enterprise. Capital base for the enterprise is therefore broad. This can consequently impact on the asset portfolio of the enterprise, given its portfolio over time. Credibility and customer pooling Given the grounds under which such an enterprise is established, it is held to be more credible than the non-registered enterprises. On the same note, frequent monitoring and applicability of law to such an enterprise is associated with effectiveness of duty discharge. As a result, such an enterprise is likely to accumulate more and more customers with time because its validity and credibility is guaranteed by law. Corporate business enterprises have their disadvantages. They include: Registration requirements The process of corporate enterprise registration is costly and time consuming. Resources must be put in place prior to this process. On the same note, the registration process may not be approved leading to waste of both time and resources as opposed to non-corporate enterprises. Capital requirements A corporate form of a business enterprise requires huge financing requirements. Access to sources of finances may be affected by that enterprise’s ability to repay its debts where contribution of owners is not enough to set up the business or meet operational costs. Management issues Challenges of management are likely to emerge due to the fact that in most cases such an enterprise is owned by a number of people. Their interest, goals and objectives in pursuit of intended operations and performance may vary, constituting a challenge altogether of how the enterprise should be run and by who. 2.1 Which is more meaningful to economic policy makers, nominal or real GDP? Does your answer make any assumptions about what policy makers want to know? Justify your answer. Real GDP is more meaningful to economic policy makers than nominal GDP. Nominal GDP is measured in current prices which may be influenced by an increasing general price level. In other words, nominal GDP is highly influenced by inflation (Gupta, Mandal & Gupta, 2008). It is important to point out that an increase in national income may occur as a result of an increase in price level or as a result of an increase in consumption. It is in this regard that economic policy makers prefer real GDP to nominal GDP. Real GDP is measured at stable prices of an identified base year. As a result, increase or decrease in GDP is less influenced by instability that may characterize price level in the economy over time. 2.2 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 is inadequate in measuring social welfare due to its principle focus on costs rather than both costs and benefits. It does not consider the specific types of goods and services produced. For instance, certain goods and services may be produced and improve status, but fail to meet basic human needs that actually define social welfare (Gupta, Mandal & Gupta, 2008). On the same note, GDP per capita fails to consider income and wealth distribution in the society. Also, issues of externalities to the society are not addressed in using GDP to measure social welfare. GDP can become a better measure of social welfare if it assesses income distribution in measuring social welfare. Externalities to society and all other factors undermining instability should be accounted for. Addressing these issues would make GDP a better measure of social welfare. 2.3 Suppose you are given the following data: Year Nominal GDP GDP Deflator Real GDP 1989 5,244 1.08 485,555.56 1990 5,514 1.13 487,964.60 1991 5,672 1.17 484,786.32 a) Compute real GDP for each year. 1987 is the base year. Show your work. Real GDP = GDP/GDP deflator 1989: (5514/1.08)100 = 485,555.56 1990: (5514/1.13)100 = 487,964.60 1991: (5672/1.17)100 = 484,786.32 b) In your own words, but accurately, characterize the performance of the U.S. economy over the period 1989–1991 The U.S economy experienced a significant growth between the year 1989 and 1990. However, the scenario reversed between 1990 and 1991, getting to a point lower than that of the year 1989. Considering the presented scenario over the three years, the business cycle shows that the economy is likely to have been in a depression in the year 1991, while the years 1989 and 1990 depict a recovery to a boom movement. Reference Gupta, K., Mandal, R. & Gupta, A. (2008). Macroeconomics. California: Atlantic Publishers & Dist. Read More