1.The system we use to measure the value of an economy is called national income
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Question
1.The system we use to measure the value of an economy is called national income accounting. Gross domestic product is the most commonly used method of national income accounting. Please define GDP.
2.The real value of any variable is its nominal value adjusted for inflation. Please define real GDP. What has it do to with the price of the base year?
3.There are three approaches to the measurement of GDP: income approach, expenditure approach and value added approach. The income approach sums up the income earned by all factors of production. According to this approach: GDP = rental income of landowners + wage income of labor + interest income of capitalists +profit of entrepreneurs. The expenditure approach sums up expenditures made by different groups of spenders in the economy. They are: households’ consumption expenditure (C), firms’ investment expenditure (I) + governments’ purchase (G) + foreigners’ purchase (NX).
4.Inflation occurs when the price level (average price) in the economy rises. Consumer Price Index (CPI) is the most commonly used price index to track changes in prices for the typical household in the U.S. For the base year, CPI is always 100% as it compares its price with itself. Please see a hypothetical CPI for different years below.
Year CPI
2010 96%
2011 100%
2012 107%
2013 109%
With the help of CPI, we measure the rate of inflation for a year (or a month). inflation rate=new year CPI - previous year CPIprevious year CPI*100
(i) Using the above formula, please calculate the inflation rate for the year of 2013.
CPI in the year of 2010 was 96%. Then according to the definition of CPI, cost of living was 4% lower than the the base year (2011). As you can see, the CPI calculated for 2012 was 107%.
(ii) What was the change in the cost of living for 2012 compared with 2011?
5.Unemployment:
According to the Bureau of Labor Statistics (BLS), U.S. unemployment rate in April, 2016 was 5%. It means, on average, 5 out of 100 people in the labor force were unemployed. Unemployment rates tend to be highest during the periods of recession.
So, unemployment rate=(# of unemployed ÷ labor force)*100
In addition to unemployment rate, we use another term called ‘labor force participation rate’ in the analysis of unemployment situation in the economy. Labor force participation rate tells us what fraction of the working-age population wants to be working, whether or not they actually have a job.
labor force participation rate=(population in the labor force ÷ working age population)*100
Say, for an economy,
Population: 100m.
Working age population: 90m
Employed population: 70m.
Unemployed population: 75m.
Please calculate:
(I) labor force
(II) unemployment rate
(III) labor force participation rate.
In unemployment literature, a discouraged worker is a person of legal employment age who is not actively seeking employment or who does not find employment after long-term unemployment. This is usually because an individual has given up looking or has had no success in finding a job, hence the term "discouraged".
(IV) In the aftermath of the great recession of 2007-2008, number of discouraged workers increased despite the fall in unemployment rate . Please explain how can the unemployment rate fall despite having a large number of discouraged workers.
Explanation / Answer
1. GDP refers to the total market value of all goods and services produced within the geographic boundaries of a country within a given year.
2. Real GDP is the nominal GDP after adjusting it for inflation. Nominal GDP is the market value of all goods and services produced within the geographic boundaries of a country within a given year on the basis of current prices. When we adjust nominal GDP for the inflation, we get real GDP. So, real GDP is the value of all goods and services produced within the geographic boundary of a country calculated on the basis of constant price.
The base year is the year the price level of which is considered to be the base price for calculating inflation. Inflation is calculated on the basis of the percentage change in the price level in the current year from the base year. Nominal GDP is discounted using the inflation rate to arrive at the real GDP.
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