GDP and Economic Indicators \"Gross Domestic Product

GDP and Economic Indicators

"Gross Domestic Product and other economic indicators"

GDP and other economic indicators

Q.1) Define:

Gross Domestic product:

Gross domestic product is the value of all the good and services of a particular country which is produced over a year's time. For the value to be accurate it is made sure that all the goods and services included are the ones produced inside the boundaries of the country. The goods and services may be produced by the nationals of that country and by the foreigners in that country, but the production has to be inside the boundaries of the country. The formula to calculate GDP includes five components which are the consumption by households (denoted by C), the government spending done (denoted by G), the investment done in the country (denoted by I), the imports that were done in that year (denoted by M) and the exports of that particular year (denoted by X). The formula is: GDP = C + I + G + (X - M). The basic reason for finding the GDP is to analyze how strong a country's economy is locally.

2. Real GDP:

The value of GDP that comes may always show an increase but the increase is not accurate as a certain percentage of inflation (increase in price level) might have taken place that year. Real GDP shows the inflation adjusted amount of GDP so the accurate increase or decrease in GDP can be calculated as compared to the year before, or a certain base year that is selected.

3. Nominal GDP:

The calculation of GDP without adjusting for inflation is called Nominal GDP. It shows all goods and services at the value they were priced at in the current year.

4. Unemployment:

Unemployment is a condition when a person who possesses skills and is willing to do a job, cannot find a job, therefore is left jobless. Getting rid of unemployment by bringing it down as much as possible is one of the functions of the government. Unemployment also measures how well an economy is performing, as if the economy is going through a recession you will see a rise in unemployment. Unemployment gives a boost to the existing poverty in a country and also creates social issues.

5. Inflation Rate:

Inflation rate is the measure of general increase in price level over a year. It is measured by keeping a base year and comparing prices of all different types of commodities that exist in the market. This is done through the consumer price index (also known as CPI). There exist more price indexes such as the sensitive price index which tells price increase in eatable items and wholesale price index which shows increase in price level for wholesale goods.

6. Interest Rate:

Interest rate is the cost of borrowing. It is a tool used by financial institutions to charge people who borrow money and to give to people as an advantage when they save or invest money in the institution. It is calculated by multiplying a certain percentage to the amount borrowed or saved. Interest rates are used by the government in its monetary policy to control the flow of money in the economy. By increasing interest rates they would encourage saving and thus the amount of money flowing in the economy would decrease.

Q.2) Consider the following examples of economic activities:

1. Purchasing the groceries

2. Massive layoff of employees

3. Decrease in taxes

Describe how each of these activities affects government, households, and businesses. Describe the flow of resources from one entity to another for each activity.

1. Purchasing the groceries:

When we purchase groceries, our income is flowing out of our households and into the market. By buying groceries our income flows into businesses therefore the sales of that business increase. With that money the business pays for its raw materials and returns any possible credit that they had taken on the production of the goods so the financial institutions get money. They pay taxes for the production that they had done or the sales that they have made so that goes to the government. When the business pays its factors of production, one of the main factors of production is labor, and when labor is paid the money and the money thus flows back to the households.

2. Massive layoff of employees:

When massive layoff of employees takes place, it affects the households as well as the government. The households now have less income to spend and are now under more pressure to manage the limited amount of money that they have, until they get a new source of income. With the massive layoff of employees comes an increase in unemployment in the country and increases the responsibilities of the government as to decrease unemployment is one of their major functions. The government has to create opportunities for people to get jobs by providing subsidies to companies and increasing their capacity to produce. The government sets millennium development goals, one of which is to reduce unemployment in their country. The government is also criticized at many times for their role. There have been studies which have shown that the increase in unemployment is directly proportional to the size of the government, where the bigger the government, the larger the unemployment rate. (Feldmann, 2009).