...four reasons why using percentage change in nominal GDP is an inadequate measure of economic growth” (20 marks) A normal GDP is defined as the GDP calculated using current market prices. This means that it does not take inflation into account. This is an inaccurate measure of the economic growth. The reason for this is that the sustained increases in prices over the years do not allow for the measurement to be realistic. For example, is a mars bar is not 60p now and was 40p fifteen years ago, then the 50% increase in price is going to contribute to the GDP. If compared to the nominal GDP 15years ago the current GDP will be much higher as OUTPUT+EXPEDITURE=INCOME. But this is not the true value as inflation has forced prices to go up and therefore be measured and calculated to give a much larger GDP. If one creates a scenario where the value of the 40p bar and the current 60p bar is the same then the GDP (if transferred to all the other objects) should be the same. Real GDP would take this inflation out of the equation and replace it with the base value of the product. This would in fat give a much more accurate measurement of the GDP at the current time. When referring to economic growth, GDP gives a large hint to where economic growth is. The use of nominal GDP is therefore going to give the wrong conclusion to the direction of economic growth and so it is not an adequate measurement of economic growth. Also the quality of products is not accounted for in the GDP. The improvements...
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...Basic Definitions • • • • GDP Inflation Rate Unemployment Rate Trade and Budget Deficits Gross Domestic Product • First thing we look at (its rate of growth) • Aggregate output: Not easy! – Sum of apples and oranges – Double-counting • Example A Simple Economy • Steel Company – Revenue from sales – Expenses (wages) – Profit $100 80 20 $210 $70 100 • Car Company – Revenue from sales – Expenses • Wages • Steel purchases – Profit 40 • What is this economy’s GDP? Calculating GDP • Method 1: GDP is the value of the final goods and services produced by the economy during a given period • Method 2: GDP is the sum of valued added produced…. • Method 3: GDP is the sum of incomes in the economy... Nominal vs Real GDP • Nominal GDP: sum of final goods produced times their current price – Growth due to quantity (production) – Growth due to prices • Real GDP: … times their base year price • Example (next trp.) • GDP Growth: (Y(t)-Y(t-1))/Y(t-1) Nominal vs Real GDP Year 0 Q Potatoes 100,000 Cars 10 Nominal GDP P $1 $10,000 Value 100,000 100,000 200,000 Year 1 Q Potatoes 100,000 Cars 11 Nominal GDP P $1.2 $10,000 Value 120,000 110,000 230,000 The Inflation Rate • More than one…. (P(t)-P(t-1))/P(t-1) • GDP deflator and CPI • GDP deflator = Nominal GDP / GDP – P0 = 1 – P1 = 230,000/210,000 = 1.1 (approx.) • NGDP growth = GDPg + Inflation (defl) • 15 5 10 • Why do we care? The Unemployment...
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...markets, along with the economic growth. It strives to demonstrate the fact the equity market performance is dependent upon the earnings growth of the companies and the earnings growth is somewhat capped by the real GDP growth of the economy as a whole. In other words, the equity markets are not to be conceived as a medium which could generate supernormal returns; instead, the return could be capped at about 4% over the real GDP return. Review The article highlights the fact that an economy will attract investments as long as the marginal return (represented by the marginal product of capital) is higher or equal to the cost of capital. The companies (which constitute the economic and commercial activities of the economy) will grow at a higher rate than inflation as long as the marginal product is equal to the cost of capital. Once that level is reached, the companies will be able to generate a return which is identical to the real GDP growth of the economy. In short, the companies will be able to generate a higher return than the GDP in the short run, but the return would be somewhat capped by the real GDP growth in the long run. This will have a direct impact on the returns of the capital markets. The real GDP growth seeks to impose theoretical limits on the earnings of the growth of the commercial entities The above mentioned facts explain as to why the real long term growth for any economy remains constant with a positive bias. Much of the growth is also based on increase in...
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...indifference curves; draw a curves for wine and cheese. Describe and explain four properties of these indifference curves? 5. What do you mean by political economy? How political economy different from behavioral economic? 6. Explain why an economy’s income must equal its expenditures? (fiscal policy) 7. Why do economists use real GDP rather than nominal GDP to gauge (test) economic well- being? 8. Why is it desirable for a country to have a large GDP? Give example of something that would raise GDP and yet be undesirable. 9. What do you think has a greater effect on the consumer price index: a 10 percent increase in the price of wheat or a 10 percent increase in the price of rice? Why? 10. Describe the three problems that make the consumer price index an imperfect measure of the cost of living? 11. Explain the meaning of nominal interest rate and real interest rate. How are they related? 12. What does the level of a nation’s GDP measure? What does the growth of GDP measure? Would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low level of GDP and a high growth rate? 13. What is a government budget deficit? How does it affect interest rates, investment, and economic growth? 14. What is national saving? What is private saving? How are these three...
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...------------------------------------------------- Page 124 Check Your Understanding 3. Describe the circular flow diagram. Why must all income equal spending in the economy? The circular flow diagram is a representation of how businesses and households network amongst one another through the product and resource markets. Households supply labor to the resource market. In turn, businesses use this labor to produce goods and services that are provided to the product market. Overall, products will soon be purchased back by consumers and returning to households. The clockwise arrow is to show the movement of real items such as, hours worked and so on. The counterclockwise arrow is to show the movement of money. The reason that income must equal spending in the economy, is because for every dollar spent by some buyer is a dollar of income for some seller. 4. Why does GDP accounting include only the final value of goods and services produced? What would be the problem if intermediate products were included? The reason why only final goods and services are counted, is to steer away from multiple counting. The cost of all intermediate products and services are already included in the final sales price. So by including them would mean that the product(s) where double counted, which would overstate gross domestic product. 5. Describe why GDP can be computed using either expenditures or income? GDP can be computed by either expenditures or income due to the idea that everything that is produced...
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...14/01/2016 PART 1 Introduction Macroeconomics: Branch of economics that studies the economy as a whole, especially the overall levels of production, employment, consumption, investment and prices. Microeconomics: Branch of economics that studies the individual behavior of firms and consumers and how they interact on a particular market. Macroeconomics focuses on the following issues: - Where does economic growth come from? - Could economic growth continue indefinitely, or is there some limit to growth? - Is there anything that governments can do to alter economic growth? - What are the origins of business cycles? - Should governments act to smooth business cycles ? - What does cause high rates of inflation? - How does the central bank affect prices and interest rates? - What are the root causes of a high unemployment rate? - Should countries adopt fixed or flexible exchange rates against the U.S. dollar? To answer previous questions, Macroeconomists use theories and models. - In economics, as in other sciences, explanations and predictions are based on theories and models. - A theory is a set of rules and assumptions used to explain observed phenomena. - A model is a simplified representation of the reality based on theories. - In economics, a model usually consists of a system of equations. 1 14/01/2016 - The relationship between facts, theories, model, and predictions: Predictions Model Theories Data “If I could...
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...Learaye Macroeconomics Economic Growth & GDP “Gross domestic product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of neither public debate not the integrity of our public officials. It measures neither our courage nor our wisdom, not the devotion to our country. It measures everything, in short, except that which makes life worthwhile and it can tell us everything except why we are proud to be Americans.” Quote by Robert F. Kennedy GDP GDP is not a measurement of overall prosperity of a nation and it fails to measure some aspects of a national economy. As you can gain from the quote by Robert F. Kennedy, we do not use this to measure those things which “make life worthwhile” but rather use it to judge one country from another. It helps to evaluate how societies function in different economic environments and how to use this measurement to improve conditions in a society or to keep things flowing for a healthy economy. Gross Domestic Product (GDP) is defined as the total market value of final goods and services produced by factors of production. GDP also measures markets of what is being produced or whether problems are occurring. There is a relationship presented with a circular flow model that gives us a picture of the flow of production being produced in an economy. The circular flow model demonstrations...
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...Glenda Stahl 03/13/16 Week Eight Homework What is economic growth and how do we use GDP to measure an economy? Economic growth is measured by the value of all the products manufactured and sold in a country over the course of one year along with everything people do and get paid for. There are four categories that create GDP: consumers, investments, governmental spending and other companies that buy from another country. GDP measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment. However, there are countries that are trying to include social cohesion and the environment because it does have an effect on economic growth. What cause or contribute to the growth of an economy? Economic growth is measured by real GDP growth where the ability of a country to increase the value if it’s production of goods and services after removing the effects of inflation. When people earn more money they buy more products which results in economic growth. Economic growth is important for a country because it leads to a better standard of living for all its citizens, even the poor. Countries with a good economy can offer better health care services, safer working conditions and spend more on insuring a cleaner environment. Also, economic growth allows countries to reinvest money into areas that will promote future growth such as education, technology, capital and infrastructure. What is the rule of 70?...
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...contentment in the fact that momentary measures intended to aid recovery add very little to the long-term deficit problem. The increase in deficits for several years recedes in comparison to the size of the economy over the long run. As the economy recovers, however, politicians will need to demonstrate to the public and the lenders who finance our borrowing needs that they are prepared to move the budget toward a sustainable long-run path. President Obama’s initial budget proposal and the health reform packages that the House and Senate have passed represent first steps toward putting the federal budget on a sounder footing. Health reform is crucial because rising spending for health care is the major force driving the projected future growth in federal deficits and debt. There are, however, only first steps. Much will need to be done to address the full scope of the long-term budget problem. It would be advisable for politicians to act sooner rather than later on a package of credible deficit reductions, while delaying the effective date of some provisions by several years until the economy is in much stronger shape. Policymakers...
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...HP Envy dv7t-7200 Quad Edition Notebook PC Acer Aspire V3-571-9890 1) Compare the following items for your selections: a. Price: HP $999.99, Acer $729.99 b. Delivery Charges: HP Standard shipping $9.99, Acer Standard Ground Shipping $15.00 c. Financing Options: HP No payments/Interest if paid full in 12 months, Acer no current offer d. Discounts: HP additional 15% off accessories with pc purchase, Acer free overnight shipping e. Coupons: Could not find coupons, companies possibly send these with shipped items f. Warranties: HP Two year limited hardware warranty, Acer one year international travelers limited warranty g. Installation Offered: HP windows 8 os, Norton internet security 2012, hp games; Acer windows 8 os h. Recycling of Old Components Offered: HP offers information on recycling different products in your local area, Acer also has a recycling program with information on how to dispose of components in your area. 2) What are some factors that can impact the gross profit of a merchandise company? There are many different factors that can impact the gross profit of a merchandise company including an increase in supplies, labor, and taxes. Anything that increases the cost of producing a product or providing a service affects the gross profit of the merchandise/service. In many markets, companies do not have the ability to increase the price of their product just because of increase in production costs, thus costing them profit. 3)...
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...October 26 08 Fall The Determinants of Economic Growth ------------------------------------------------- Executive summary ------------------------------------------------- Introduction Barro (1991) and Fernandez, Ley, and Steel (2001) use various regression techniques to determine the key determinants of growth, and in particular, the driving forces behind cross-country variations. Neoclassical growth theory proposes that cross-country and per capita income will converge due to diminishing returns to capital and the diffusion of technology. There are samples of countries that display this ‘absolute convergence, however, such a phenomenon is not universal. These seemingly inexplicable variations in growth present an important question of what are the determinants and is there a role for stabilizing policy. Explain why the study is important. Why is economic growth so important? Coexistence of Growth miracles, Growth Disasters Barro (1991) provides that it is ultimately the relationship between the level of human capital and initial GDP that allows some poor countries to converge on rich countries. Ultimately, our conclusion parallels that of Barro’s and we find that the driving determinants of growth are Human capital, Investment and the initial GDP level. Our analysis follows the key ideas and assumptions of Barro’s model. We use both Primary and High School enrolment as a proxy for the accumulation of Human capital, however, this does pose some restrictions...
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...GDP Research Paper The definition of Gross Domestic Product (GDP) defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year, while the real GDP is the GDP that has been deflated or inflated to reflect changes in the price level (McConnell, C. (2011). Macroeconomics [VitalSouce bookshelf version]. Retrieved from http://online.vitalsource.com/books/1259174522/epubcfi/6/52). According to BEA, the growth of real GDP decreased one percent in the first quarter of 2014, in the fourth quarter of 2013, the growth of real GDP increased two point six percent (News Release: Gross Domestic Product. (n.d.). News Release: Gross Domestic Product. Retrieved June 23, 2014, from http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). The trends in the growth of real GDP is very unstable. For example, in 2010, the GDP kept growing, but the extent seemed to become lower; The first quarter of 2011 was negative, but then the growth in real GDP became positive; In 2012, the growth in real GDP was always positive, merely the fourth quarter’s growth was hardly to be aware; 2013 was a very successful year, the growth in GDP was significant; Unfortunately, the first quarter in 2014 was negative. Things are little different in the corporate profits, it seemed that the profit in the first quarter of every year would always be negative. Corporate profits declined almost ten percent...
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...production, trade, distribution, and consumption of goods and services. 1 9/26/2012 • Macroeconomics: examines overal level of national income, employment, and prices of an economy. 1. National output/income: total output of an economy is Gross Domestic Product (GDP) 2. Employment: Labor force includes all employed persons and those unemployed individuals who are seeking jobs. 3. Stable prices: consumer price index (CPI), inlfation rate Why national income? • The ultimate objective of economic activity is to provide the goods and services that the population desire. e.g. shelter, foods, education, recreation • • The most comprehenshive measure of the total output in an economy is the gross domestic product (GDP). GDP is the measure of the market value of all final goods and services produced in a country during a year. Gross domestic product growth rate 12 10 8 6 4 2 0 -2 • Why some countries are rich, while others are poor? • Size of GDP? GDP growth rate? • What factors affect GDP growth rate? • What need to be done to foster GDP growth? e.g. saving, investment, education, or exploit natural resources? -4 -6 2 9/26/2012 Why employment? • Employment is an macroeconomic indicator that are most directly felt by individuals. • Macroeconomic objective is high employment and low unemployment. • Unemployment rate: is the percentage of labor...
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...Government Spending: Stunting GDP growth. Brendan Sookraj Webster University FINC 5830 Fall I 2013 September 07, 2013 Author Note Certificate of Authorship: This paper was prepared by me for this specific course and is not a result of plagiarism or self-plagiarism. I have cited all sources from which I used data, ideas, or words either quoted or paraphrased. Date : __________________________ Signature: Abstract As dictated in fundamental Macroeconomic theory, there are four main components that are involved in calculating a nation’s GDP: personal consumption, business investment, net exports and government spending. The formula, therefore, Y= C+I+E+G, provides a mathematical framework that shows the relationship of Government spending as it relates to growth in GDP. Unfortunately, the financial atmosphere and economic trends in the last 5 years has suggested that government spending in fact may have no or negative correlation to economic growth in a country. Undoubtedly the concept of Government spending growing an economy can be deemed obsolete. The realities of the fiscal troubles that the world economy has been immersed in for the past six years, stems from the ideals of Keynesian economics which, arguably stifles free enterprise and is restricts the movement of a free market system. The gross domestic product, a robust measurement of the solvency...
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...economy experiences growth if it produces more goods and services than the year before. (T) (An increase in the production means an increase in the GDP) b. Investment in physical capital means hiring more employees. (F) (Human capital is used for workforce) c. The convergence hypothesis asserts that poor countries grow slower than rich countries, thereby widening the income gap between the two sets of countries. (F) d. Trend output fluctuates around actual output, since it is latter that matters most. (F) (Actual output fluctuates around Trend output due to change in trends) e. Real business cycles assume that cycles reflect fluctuations around output, while political cycles reflect fluctuations around the political establishment. (T) ( f. In the business cycle, recession follows boom, and is followed by slump. (T) g. During recession, business profits increase. (F) Multiple Choice: 2) An increase in living standards generally takes place when: a) GDP grows vigorously over a long period of time. b) GDP declines only moderately. c) GDP is volatile. d) GDP long-term trend is flat. 3) Which of the following is NOT an example of an increased standard of living? a) Lower life expectancy. b) Indoor plumbing. c) Medical advances. d) Telephones in every home. 4) Long-term growth is measured by: a) Looking at real GDP per capita for a long period of time. :: b) Looking at real GDP per capita over one...
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