intro to econ Three of the variables that are often used to measure the health o
ID: 1211708 • Letter: I
Question
intro to econ
Three of the variables that are often used to measure the health of the economy are output, unemployment, and price level inflation. In order to study these three, we need to be able to measure them. Choose one of the three and then name and briefly describe how the measure is constructed (is it a sum, an average, a ratio, a rate of change of what), and describe a limitation of the measure-this limitation might be a source of measurement error or it might be a discrepancy between what the measurement can capture and what we really want to know.Explanation / Answer
A) FOR THIS EXERCISE I WILL CHOOSE OUTPUT OR GROSS DOMESTIC PRODUCT (GDP). GDP IS TOTAL VALUE OF THE GOODS AND SERVICES PRODUCED INSIDE THE GEOGRAPHICAL TERRITORY OF AN ECONOMY. FOR MEASURING OUTPUT IN AN ECONOMY WE MAKE USE OF THE FOLLOWING FORMULA WHICH ADDS UP SEVERAL ITEMS
GDP = CONSUMPTION + INVESTMENT + GOVERNMENT SPENDING + NET EXPORTS (EXPORT - IMPORT).
CONSUMPTION OVER HERE MEANS THE VALUE OF GOODS AND SERVICE BOUGHT BY PEOPLE FOR PRIVATE USE. INDIVIDUAL BUYING ACTS ARE SUMMED UP OVER TIME PERIOD. IT IS NORMALLY THE LARGEST PART OF GDP.
INVESTMENT IS THE AGGREGATE OF INVESTMENT EXPENDITURE INCLUDING BUSINESS INVESTMENT ON CAPITAL EXPENDITURES. GOVERNMENT SPENDING INCLUDES ALL GOVERNMENT CONSUMPTION, INVESTMENT AND TRANSFER PAYMENTS. AND NET EXPORTS MEANS THE TOTAL DIFFERENCE BETWEEN GOODS EXPORTED AND IMPORTED INTO THE COUNTRY, WHICH SHOWS THE NET OUTPUT.
THUS BY MEASURING AND ADDING UP THESE ITEMS THE OUTPUT OF AN ECONOMY IS CALCULATED AND ITS HEALTH IS MEASURED.
B) AS REGARDS THE DIFFICULTY IN MEASUREMENT IS CONCERNED FIRST OF ALL THE OUTPUT DOES NOT MEASURE THE WORK DONE JUST OUT OF LOVE ND AFFECTION BY STAY AT HOME PEOPLE OR PARENTS, VOLUNTARY ACTS DONE FREE OF COSTS. YET ANOTHER LIMITATION OF ABOVE MEASUREMENT IS THAT IT INCLUDES ALL GOODS PRODUCED IRRESPECTIVE OF THEIR SALE FOR FINAL CONSUMPTION BUT STILL THEY ARE INCLUDED IN OUTPUT.
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