Economics Development - Assignment

Running Head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Course ID

1ECONOMICS ASSIGNMENT
Table of Contents
Task 6...............................................................................................................................................2
Answer 1......................................................................................................................................2
Answer 2......................................................................................................................................2
Answer 3......................................................................................................................................2
Answer 4......................................................................................................................................3
Answer 5......................................................................................................................................3
Answer 6......................................................................................................................................3
Task 7...............................................................................................................................................4
Answer 1......................................................................................................................................4
Answer 2......................................................................................................................................4
Answer 3......................................................................................................................................5
Answer 4......................................................................................................................................5
References........................................................................................................................................8

2ECONOMICS ASSIGNMENT
Task 6
Answer 1
Gross Domestic Product of a nation is a measure of total market value of goods and
services that the country produces are a given year. Intermediate goods refer to the kind of goods
that are made as an input in the production of finished good. GDP includes only market value of
final goods and services. As intermediate goods are not directly marketed they are not included
in the measure of GDP (Goodwin et al. 2015). Whether a good is used as an intermediate goods
or a final good that depends on nature of use. Salt is an example of intermediate good. Salt can
be consumed directly and can also be used in manufacturing food products.
Answer 2
GDP= ( 5000× $ 300 )+ ( 500× $ 25000 )+ ( 100× $ 2000 )
¿ $ 1500000+$ 12500000+$ 200000
¿ $ 14200000
GDP of a nation signifies market values of final goods and services produced within the
country. In the computation of GDP, only final goods are included (Agénor and Montiel 2015).
For the given economy, steel is used as an intermediary to produce cars. Therefore, in
calculating GDP, the value of steel is not included. Other goods and services such as iPods, Cars
and legal services are included. The respective values are obtained from the product of goods and
services. GDP is the sum of the values of goods and services. GDP for the given closed
economy for the year 2016 is obtained as $14200000.
Answer 3

3ECONOMICS ASSIGNMENT
Unemployed. The person is unable to retain position because of lack of skills. The
unemployment problem that the person is facing is called structural unemployment.
Answer 4
The person is not in the labor force. As the person is engaged in full time study he is not
considered as a member of the labor force.
Answer 5
The unemployment rate provides a measure to understand prevalence of unemployment in the
economy (Bernanke, Antonovics and Frank 2015). The rate of unemployment express number of
unemployed person as a percentage of total labor force.
Given the information, number of unemployed person = 500
Size of the labor force = Number of employed + Number of unemployed
= 8000 + 500
= 8500
Unemployment rate= Number of unemployed
¿ the labor force × 100
¿ 500
8500 ×100
¿ 5.88 %
Labor force participation rate reflects the portion of working age population who are either
employed or are actively looking for employment.
Answer 6

4ECONOMICS ASSIGNMENT
CPI for 2015= Cost of basket at 2015 prices
Cost of basket at 2005 prices ×100
¿ ( 2× $ 1200 )+ (50 × $ 30 )+ (150 × $ 2.00 )
( 2× $ 1700 )+ (50 × $ 25 )+ ( 150× $ 1.00 ) ×100
¿ $ 2400+$ 1500+ $ 300
$ 3400+$ 1250+ $ 150 × 100
¿ $ 4200
$ 4800 ×100
¿ 87.5
Consumer price index is a simplified measure for comparing the price of basket of goods
in current year relative to a base year (Heijdra 2017). The CPI is obtained as 87.5. This implies
basket of good that cost $100 in 2005 costs $87.5 in 2015.
Task 7
Answer 1
The first reason for downward sloping aggregate demand curve is the wealth effect
described by Pigou. A fall in price level increases real income inducing people to spend more
and hence, a higher aggregate demand. The second reason is the interest rate effect as explained
by Keynes. A decline in price level lead to a fall in interest rate. A low interest rate means higher
investment and higher aggregate demand (Uribe and Schmitt-Grohé 2017). The third reason for
downward sloping aggregate demand curve is derived from the Mundell-Fleming’s model of
exchange rate. Price and interest rate by influencing exchange rate affects aggregate demand.
Answer 2

5ECONOMICS ASSIGNMENT
The pessimistic view about future economic growth reduces confidence of consumers.
This discourages consumers to consume more. Consumption being one of the major component
of aggregate demand, a decline in consumption decreases aggregate demand a shifts the
aggregate demand curve to the left (Johnson 2017).
Answer 3
A decrease in export cause a decrease in export earnings. Export affects aggregate
demand curve through the term net export (Export – Import). As export decreases, net export
declines as well. This leads to a fall in aggregate demand (Mankiw 2014). The decline in
aggregate demand is reflected from a leftward shift of the aggregate demand curve.
Answer 4
In reference to the given article, the weak household sector likely to reduce consumption.
The slow-down of construction sector reduces the prospect of employment causing a fall in wage
share. The two components of GDP mostly influenced are consumption and investment. A
decline in household consumption and investment reduces aggregate demand.

6ECONOMICS ASSIGNMENT
Figure 1: Short run and long run equilibrium adjustment
(Source: as created by Author)
The figure above explains equilibrium adjustment process. The long run equilibrium
point is at A. This is the point where long run aggregate supply, aggregate demand and short run
supply meets at a point. The maximum potential output of the economy is YE. Weak household
sector weakens consumption and investment. This reduces aggregate demand to fall as reflected
from an inward movement of aggregate demand curve from AD1 and AD2. In the short run the
economy moves from point E, lowering the price level and GDP to P1 and Y1 respectively. The
low price and low wage reduces cost of production (Dullien et al. 2017). This encourages firms
to increase production by raising their profit share. The short run supply curve thus shifts
rightward from SRAS to SRAS1. The new equilibrium point is C, where potential output is
reached but at a lower level of price. The low price in the long run gradually increase aggregate

7ECONOMICS ASSIGNMENT
demand. The process continues unless the economy reaches to its original long run equilibrium
point A with a potential output level of YE and corresponding price level of PE.

8ECONOMICS ASSIGNMENT
References
Agénor, P.R. and Montiel, P.J., 2015. Development Macroeconomics Fourth edition. Economics
Books.
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill
Higher Education.
Dullien, S., Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M.,
2017. Macroeconomics in Context: A European Perspective. Routledge.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Uribe, M. and Schmitt-Grohé, S., 2017. Open economy macroeconomics. Princeton University
Press.