GDP, Economic growth, Unemployment and Inflation

This study material discusses the concepts of GDP, economic growth, unemployment, and inflation. It explains how changes in income, business closures, and unemployment benefits affect national income. It also explores the calculation of inflation rate and analyzes the impact of natural disasters on supply and demand. Additionally, it covers the business cycle and the effects of consumer confidence, interest rates, and export demand on aggregate demand and supply. References to relevant macroeconomic theories and principles are provided throughout the material.

Running head: ECONOMIC PRINCIPLES
Economic Principles
Name of the Student
Name of the University
Course ID

1ECONOMIC PRINCIPLES
Table of Contents
Task 6: GDP, Economic growth, Unemployment and Inflation................................................2
Question 1..............................................................................................................................2
Question 2..............................................................................................................................2
Question 3..............................................................................................................................2
Question 4..............................................................................................................................4
Question 5..............................................................................................................................4
Question 6..............................................................................................................................4
Question 7..............................................................................................................................5
Task 7: Business Cycle and aggregate demand and supply.......................................................6
Question 1..............................................................................................................................6
Question 2..............................................................................................................................7
Question 3..............................................................................................................................7
Question 4..............................................................................................................................8
References..................................................................................................................................9

2ECONOMIC PRINCIPLES
Task 6: GDP, Economic growth, Unemployment and Inflation
Question 1
After joining the manufacturing company, Mr. Lee’s income increases by ($4000 -
$3500) = $500. The change in Mr. Lee’s income will add to the change in national income.
Because of business closing down, two of his employees were dismissed receiving a salary of
$1000. For this, change in national income is – ($1000 * 2) = - $2000
The employees now receive an unemployment benefit worth $500. Total unemployment
benefit paid is ($500 * 2) = $1000. This however not included in national income as no goods
or services are received against such payment (Uribe and Schmitt-Grohe 2017).
Therefore, change in national income = $500 - $2000 = - $1500
Question 2
Inflation rate= CPIt −CPIt−1
CPIt
× 100
¿ 112.6−110.5
110.5 × 100
¿ 1.90
Question 3
Quarter
Consumer Price
Index
Inflation
rate
Dec-
09
94.3
Mar-
10
95.2
0.95
Jun-10 95.8 0.63
Sep-
10
96.5
0.73
Dec-
10
96.9
0.41

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Mar-
11
98.3
1.44
Jun-11 99.2 0.92
Sep-
11
99.8
0.60
Dec-
11
99.8
0.00
Mar-
12
99.9
0.10
Jun-12 100.4 0.50
Sep-
12
101.8
1.39
Dec-
12
102
0.20
Mar-
13
102.4
0.39
Jun-13 102.8 0.39
Sep-
13
104
1.17
Dec-
13
104.8
0.77
Mar-
14
105.4
0.57
Jun-14 105.9 0.47
Sep-
14
106.4
0.47
Dec-
14
106.6
0.19
Mar-
15
106.8
0.19
Jun-15 107.5 0.66
Sep-
15
108
0.47
Dec-
15
108.4
0.37
Mar-
16
108.2
-0.18
Jun-16 108.6 0.37
Sep-
16
109.4
0.74
Dec-
16
110
0.55
Mar-
17
110.5
0.45
Jun-17 110.7 0.18
Sep-
17
111.4
0.63
Dec- 112.1 0.63

4ECONOMIC PRINCIPLES
17
Mar-
18
112.6
0.45
Question 4
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
Aug-15
Jan-16
Jun-16
Nov-16
Apr-17
Sep-17
Feb-18
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Inflation rate
Inflation rate
Quarter
Inflation rate
Figure 1: Trend in year - end inflation rate
Question 5
Purchase of used copy of the textbook from a friend is not included in GDP.
Transaction of second hand goods are not included in GDP because those goods are already
included in GDP in the accounting year of production.
Question 6
When a publisher buys a new printing machine, this is included in GDP. Purchase of
machines adds to investment component of GDP. As investment increases, GDP increases as
well (Agenor and Montiel 2015).
Question 7

5ECONOMIC PRINCIPLES
Natural disaster like cyclone Larry destroys agricultural crops. One consequence of
Cyclone is the destruction of banana harvest causing a supply shock. The sudden decline in
supply of banana causes a nationwide shortage of banana. The shortage of supply given
demand creates an upward pressure on price (Heijdra 2017). Price of banana increases by 250
percent in the June quarter of 2006. The figure below shows the impact of cyclone on banana
price using the microeconomic framework of demand and supply.
Figure 2: Impact of cyclone on banana price
The fall in supply due to cyclone shifts the supply curve of banana to the left to S1S1.
Because of the supply shortage, equilibrium price in the market increases to P1 and
equilibrium quantity declines to Q1.
Consumer Price Index is a measure of aggregate price level that examines movement
if retail prices of a certain basket of goods and services consumed by a typical household. As
banana is a commonly purchased item, increase in price of banana leads to a change in

6ECONOMIC PRINCIPLES
measured CPI (Dullien et al. 2018). The inflation rate computed as a percentage change in
CPI increased by 0.6 percent over the June quarter. Price increases due to the fact that
demand for bananas would remain same or increases but supply has decreased. The Cyclone
thus leads to an overestimation of CPI. This is known as substitution bias in measuring CPI
as it assumes consumers continue to buy same amount of bananas. In reality however they
will choose some substitute of bananas because of high price.
Task 7: Business Cycle and aggregate demand and supply
Question 1
Figure 3: Effect a reduction in consumer confidence on long run equilibrium
The figure above depicts dynamics of long run equilibrium. In the long run, the
economy reaches to the potential level of output, the long run supply curve is vertical.
Equilibrium in the economy occurs where long run supply curve intersects the aggregate
demand curve (Brown and Narasimhan 2019). A reduction in consumer confidence lowers
consumption expenditure causing aggregate demand curve to fall. The aggregate demand

7ECONOMIC PRINCIPLES
curve shifts inward to AD1. The long run output remains at the same level at Y* while price
level declines from P* to P1.
Figure 4: Effect a reduction in consumer confidence on short run equilibrium
The aggregate supply curve in the short run is positively sloped as shown in the above
figure. Unlike the long run, reduction in consumer confidence in the short run affects both
real GDP and price level (Goodwin et al. 2015). As the aggregate demand curve shifts to the
left due to a fall in consumer confidence, price level falls to P1 and real GDP falls to Y1.
Question 2
Increases in interest rate because of an increase in domestic price reduces investment.
As interest rate is the cost of investment, an increase in interest rate discourages investment.
Investment being one of the major components of aggregate demand, a fall in investment
reduces aggregate demand shifting the aggregate demand curve to the left.
Question 3
Slower income growth in other countries means a lower export demand for the home
countries. The decrease in export volume lowers export earning affecting the net export

8ECONOMIC PRINCIPLES
component of aggregate demand (Argy 2013). Net export, which is export less import, falls
causing aggregate demand to fall. This causes an inward shift of the aggregate demand curve.
Question 4
Economic contraction refers to a phase when the economy experiences a gradual
decline in aggregate output measured in terms of gross domestic product. This leads to a
decline in real personal income, industrial output and volume of retail sales. During this time
unemployment in the economy increases as the economy stops hiring labors due to decline in
aggregate demand. In order to identify whether the economy is in contraction performance of
different macroeconomics indicators needs to be evaluated. The primary indicators of
economic performances are gross domestic product, unemployment, inflation rate,
performance of stock market, manufacturing activity, level of inventory, retail sales, housing
market, currency strength, balance of trade and such others (Gottheil 2013). The data related
to these indicators needs to be evaluated to determine whether the economy is suffering from
a contraction. On the onset of economic contraction, GDP declines due to contraction in
economic activity. The economy considerably slows down experiencing high unemployment
rate and deflationary pressure. Average income and wages decline causing a decline in
consumption spending which leads to a decline in aggregate demand. During economic
downturn due to contraction in economic activity, currency weakens causing a depreciation
of currency. Overall during economic contraction, all the major macroeconomic variables
perform in a dissatisfactory manner.

9ECONOMIC PRINCIPLES
References
Agenor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University
Press.
Argy, V., 2013. International macroeconomics: theory and policy. Routledge.
Brown, C. and Narasimhan, S., 2019. Principles of Macroeconomics. Economics, 2020,
p.300.
Dullien, S., Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M.,
2018. Macroeconomics in Context. Routledge.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
Gottheil, F.M., 2013. Principles of macroeconomics. Nelson Education.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Uribe, M. and Schmitt-Grohé, S., 2017. Open economy macroeconomics. Princeton
University Press.