1) Does the goal of full employment imply zero unemployment? If not, what types
ID: 1229226 • Letter: 1
Question
1) Does the goal of full employment imply zero unemployment? If not, what types of unemployment would you expect to be present if the economy is at full employment?2) Why is price stability an economic goal? What are the problems associated with rapid inflation? Why is economic growth important? What are the two causes?
3) What is the debate regarding discretionary vs. non-discretionary policy?
4) What is the distinction between GNP and GDP?
5) What is the distinction between stock and flow variables? How does this relate to net investment, depreciation, and changes in the capital stock.?
6) Discuss the two approaches to calculating GNP.
7) How is National Income derived from GNP?
8) What were the two main tenets of mercantilism? How was classical economics an attack on mercantilist theory?
9) Discuss the aggregate production function and the marginal productivity of labor?
10) Explain the rationale behind the MR=MC rule. How can the employment profit maximizing conditions be derived algebraically from this equation?
11) How can the demand curve for labor be derived from the profit maximizing employment conditions?
12) Discuss labor market equilibrium and output determination using graphs?
13) Show how the aggregate supply curve is constructed based on labor demand and supply as functions of the nominal wage?
14) Discuss the Quantity Theory of Money and the Cambridge Approach. How do changes in the money supply affect the economy? Describe the process.
15) Show graphically and discuss the construction of the aggregate demand curve.
16) Discuss the classical theory of interest. How ar the supply and demand curves in the supply of funds market determined?
17) Show how changes in autonomous investment or government spending would be offset in the classical model.
Explanation / Answer
NATIONAL INCOME ACCOUNTING National income accounting is used to determine the level of economic activity of a country. Two methods are used and the results reconciled: the expenditure approach sums what has been purchased during the year and the income approach sums what has been earned during the year. Just as firms need to know how well they are doing, so does a country. National income accounting provides the statistics to determine if the economy is encountering difficulties. GROSS NATIONAL PRODUCT The gross national product is the sum total of all final goods and services produced by the people of one country in one year. The GNP is a flow concept. It can be calculated with either the expenditure approach or the income approach. The GNP excludes intermediate goods, second hand sales as well as financial transactions. The GNP is a money amount and must be adjusted for changes in the value of money. The goal of gross national product is to measure the physical activity of a nation by adding all the different types of productions: production of cars, production of computers, etc... But adding cars and computers does not make much sense. Therefore, the prices of these goods are summed. GROSS DOMESTIC PRODUCT The gross domestic product is the sum of all the final goods and services produced by the residents of a country in one year. Summing the production of residents (rather than nationals as in GNP) gives often a more accurate picture of the level of activity in a country. The difference between GDP and GNP is net unilateral transfers and factor income of foreigners. Countries which have many foreign firms operating within their territory, have a gross domestic product larger than the gross national product. On the contrary, countries, such as the United States or Japan, which have firms operating in foreign countries, have a gross domestic product smaller than the gross national product (the net factor income from foreigners is negative). INTERMEDIATE GOODS Intermediate goods are goods which are made part of some final good. For instance, tires are intermediate goods when they are part of a car. Tires are final goods when they are sold separately as replacement parts. Incorporating intermediate goods to form a final good adds value to that good. Almost all metals and crude oil are part of intermediate goods: they are not counted separately, but as part of the final good in which they are incorporated. Tires purchased by customers to replace used tires are final consumption; but, not the tires installed on new cars: these are intermediate goods. VALUE ADDED GNP can be calculated by adding up all the value added from the intermediate goods (the result is exactly the same). Countries with tax systems based on value added taxes prefer this method. The work performed to assemble a car from its many components (such as windshield, tires, motor, and so on), is the value added in a car assembly plant. Such a value added can also be calculated by taking the difference between the selling price and the costs of all material and goods used in the product sold. EXPENDITURE APPROACH GDP can be calculated as the sum of all expenditures: personal consumption expenditure (C), gross private domestic investment (Ig), government purchases (G), and net exports (Xn). GDP = C + Ig + G + Xn.
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