Economics Assignment on GDP, Unemployment, Inflation and Aggregate Demand

This economics assignment covers topics such as GDP, unemployment, inflation, and aggregate demand. It discusses the calculation of gross national expenditure, gross domestic product, net domestic product, and savings. It also explains different types of unemployment and inflation, winners and losers in inflation, and cost-push inflation.

RUNNING Head: ECONOMICS ASSIGNMENT
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Economics Assignment

ECONOMICS ASSIGNMENT 2
Gross national expenditure is given by: Y=C+ I + G + (X-M)
Consumption = household consumption expenditure+ gross private domestic investment+
government consumption expenditure + (exports – imports).
Y=3125 + 900 + 520 + (680-580) = 4645 billion dollars (Summa & Serrano, 2015).
GROSS DOMESTIC PRODUCT BY MAKING USE OF THE EXPENDITURE APPROACH
This approach says that gross domestic product is equal to consumption + investment +
the government expenditure plus the exports minus the imports that is; the approach sums all the
factors incomes to the factor production. This approach is also called the value added approach
or the net product approach (Michaillat & Saez, 2015).
Y=C + I +G + (X-M)
(Consumption of Fixed Capital + Government Consumption Expenditure + Household
Consumption Expenditure) + Gross Private Domestic Investment + Government Investment
Expenditure + (Exports – Imports).
Y= (280 + 520 + 3125) + 900 + 200 + (680 -580) = 4925 Billion Dollars.
Net Domestic Product (NDP) is given by the GDP minus depreciation
NDP = GDP – depreciation i.e. 4925- 280 = 4645 billion us dollars.
GNP = consumption + investment + Government expenditure + net exports – net
imports) + (net income earned by residents from overseas investments + net income earned by
foreign residents from domestic investments) (Dewett, 2015).
Y= C + I + G + X + Z

ECONOMICS ASSIGNMENT 3
3125 + 520 + 900 + 100 + 20 = 4665 billion US dollars.
b) Current account balance = (exports – imports) + net property income paid overseas
i.e. (680- 580) + 20 = 120 Billion US dollars
Savings: GDP- Consumption Expenditure= National Savings
4925- (3125+ 520) = 1280 billion dollars (Del Negro , Giannoni , & Schorfheide, 2015)
c) Given a country has less exports than the imports, the additional value of exports will
lead to a reduced value of the economic output of this country. The nature of particular
economies and their business make the economy either export or import oriented. The nature
also leads to the determination of how changes in the net exports affect the economy (Benhabib ,
Wang , & Wen, 2015).
Net exports are used to compute the national GDP since they are the real values of the
total exports of a country. They are also used since they appropriately measure the aggregate
expenditure in an open economy.

ECONOMICS ASSIGNMENT 4
2 a) graph showing two business cycles
b) The decline of the real GDP from 600 billion to 575 is a recession. Recession
refers to the temporary decline in the economy and is a period whereby the activities of
industries are low and this is mostly identified by a fall in GDP measurably in two quarters.
c) Frictional unemployment refers to a situation whereby workers are not having jobs and
are looking for a job in a healthy economy. The fact that they might have left job voluntarily or
fired does not matter. This type is differentiated from the others because it forms a portion of the
normal labor turnover. This asymptotically arises when there is a deficiency in the aggregate
demand in an economy for it to support full employment. This type of unemployment represents

ECONOMICS ASSIGNMENT 5
an amount of unemployment that comes up as a result of workers being in between jobs but are
still in the labor force (Benhabib , Wang , & Wen, 2015).
Structural unemployment on the other hand is used to refer to the existence of a mismatch
between the jobs that are available and the category of the skills that are not yet employed. The
causative agent for structural unemployment is not the business cycle like in the case of cyclical
unemployment.it happens when an underlying shift in economy makes it hard for given groups
in an economy to find it not possible to get job positions. This kind of unemployment is harder to
make a corrective measure on than any other type of unemployment. Structural unemployment is
capable of keeping the rate of unemployment very high even after recession is gone.in cases
whereby the policy makers ignore it, then it might lead to a natural rate of unemployment for
several years. Here, full employment can exist in absence of any deficient demand for
unemployment but does not exist when there is frictional or even structural and voluntary
unemployment (Del Negro , Giannoni , & Schorfheide, 2015).
Seasonal unemployment is a situation whereby people are not employed at particular
times in a year when the demand for labor is lower than usual. For instance, during summer,
those workers who work in ski resorts are likely to face unemployment because there is no snow.
Cyclical unemployment

ECONOMICS ASSIGNMENT 6
This refers to a factor of the overall unemployment and it relates to the occasional ups
and downs in the growth and production that happens within the business cycle. There is
tendency of the cyclical unemployment to be low when businesses are at peak and then the
cyclical unemployment shoots when the businesses are facing an off peak. Full employment
exists occurs when all available labor resources are being used efficiently. Full efficient exists
without cyclical unemployment (Del Negro , Giannoni , & Schorfheide, 2015).
d) Zero unemployment can be theoretically possible but it is a bad idea.it is possible for an
economy to ensure that every person has a job. This can be made possible if at all the
government can guarantee jobs to the jobless people. The government can come up with make
work works that would add a little to the value of the economy (Benhabib , Wang , & Wen,
2015). Through this, the government could then have many people sweeping the streets just to
give an example.
3. A) Disinflation and deflation are two different terms that refer to two different conditions
making reference to the direction and change (Dewett, 2015). Of the general price levels.
Deflation is used to refer to the falling prices .disinflation on the other hand does not refer to the
direction of rates but refer to the rate of change. The latter is a slowdown in the rate of inflation
Disinflation is a relatively a more pronounced condition than deflation. The lower rate of
inflation at a glance appears to be positive and it is the case for the people who hold bonds
because it hikes their real returns. A rate of inflation that is falling in most cases is a sign of slow
growth rate and also an increased rate of unemployment. A given degree of inflation is a sign of
a positive development and shows that the state of economy is good. However, cases of inflation
rising at a very high rate occur. The latter leads to the evaluation of cash relative to the goods and
services and this makes people be convinced to spend more instead of saving. The increase in the

ECONOMICS ASSIGNMENT 7
expenditure leads to increased inflation and can consequently lead to hyperinflation (this is an
extremely adverse condition that is in most cases coupled with major social upheavals.in some
special cases, like the hyperinflation that occurred in Germany after the Second World War led
to the Nazis unstoppable rise in power) (Willett & Laney, 2014).
Disinflation is a relatively a more pronounced condition than deflation. The lower rate of
inflation at a glance appears to be positive and it is the case for the people who hold bonds
because it hikes their real returns. A rate of inflation that is falling in most cases is a sign of slow
growth rate and also an increased rate of unemployment. A given degree of inflation is a sign of
a positive development and shows that the state of economy is good. However, cases of inflation
rising at a very high rate occur (Willett & Laney, 2014). The latter leads to the evaluation of cash
relative to the goods and services and this makes people be convinced to spend more instead of
saving. The increase in the expenditure leads to increased inflation and can consequently lead to
hyperinflation (this is an extremely adverse condition that is in most cases coupled with major
social upheavals.in some special cases, like the hyperinflation that occurred in Germany after the
Second World War led to the Nazis unstoppable rise in power).
Deflation-the economy is said to be in a state of deflation when inflation falls below
zero.at first, this seems to be positive tools the prices of goods and services go down, the value of
cash goes up (Willett & Laney, 2014).
This leads to the postponement of expenditure by the consumers and this makes the
economy being hurt further and it becomes weaker and weaker. The latter can be a causative
agent of the deflationary spiral, a cycle that is self-reinforcing and whereby the falling rate of
consumption causes an increase in unemployment and therefore a persisting downturn in the
level of consumption. One of the most common examples of this kind of a circle happened

ECONOMICS ASSIGNMENT 8
during the time of the great depression. This period was characterized by an inflation of double
digit. Japan also underwent a deflation after the property that it owned bubble erupted in 1990.
b) Real income is given by the nominal income divided by the CPI then multiply the result by
100%
i.e. (nominal income/CPI) *100
(125000/130) * 100 = $ 96153.85
c) The losers in an inflation are the savers and the lenders. They lose because they lock the
in rates whereby the payment of interests that are received do not adjust for the inefficiency in
the real purchasing power.an example is for the case of the holders of the long term deposits and
the fixed exchange ratio (Summa & Serrano, 2015).
The winners in inflation are the borrowers and the individual corporate and also the
government. They win because the nominal amount that is repaid in the future possess less
purchasing power at the time when the prices are rising (Summa & Serrano, 2015).
4 a) Aggregate demand refers to the total demand in the economy for goods at varying price
levels. The AD demand curve is downward sloping because of: the increased power in spending,
increased demand for the exports and the lower rates of interest. The explanation for the
downward sloping for an aggregate demand is different from the one for a single consumer
because a consumer will require more of the commodity when the price falls (Michaillat & Saez,
2015). This is brought about by the income effect, a situation whereby when the price of a
commodity falls, the real income of a consumer rises and hence the consumer can buy more of
the commodity using the same amount of income. The substitution effect will also explain this in
that when the prices fall and become cheaper than its substitutes, the users of a certain

ECONOMICS ASSIGNMENT 9
commodity will shift their demand to the good and therefore the quantity demanded of this good
will go up. Law of diminishing return is another determining factor. The satisfaction acquire
from the consumption of a given commodity will go down with the additional unit (Benhabib ,
Wang , & Wen, 2015). The consumer will be hence willing to pay less by less in every additional
successive unit taken.
b) Cost push inflation occurs when there is an increase in prices as a result of the higher
costs of production and also increased cost of raw materials.it is determined by the supply side
factors (Del Negro , Giannoni , & Schorfheide, 2015). Cost push inflation can lead to a slow rate
of economic growth and also causes a decrease in the standards of living and reduced overall
GDP. The diagram below will show cost push inflation

ECONOMICS ASSIGNMENT 10
(Del Negro , Giannoni , & Schorfheide, 2015).

ECONOMICS ASSIGNMENT 11
References
Benhabib , J., Wang , P., & Wen, Y. (2015). Sentiments and aggregate demand fluctuations.
Econometrica, 83(2), 215-265.
Del Negro , M., Giannoni , M. P., & Schorfheide, F. (2015). Inflation in the great recession and
new keynesian models. American Economic Journal: Macroeconomics,, 7(1), 245-267.
Dewett, K. K. (2015). Modern Economic Theory . Chand.
Michaillat , P., & Saez, E. (2015). Aggregate demand, idle time, and unemployment. The
Quarterly Journal of Economics, 23(2), 123-147.
Summa , R., & Serrano, F. (2015). Distribution and Cost-Push inflation in Brazil under inflation
targeting. Piero Sraffa.
Willett , T. d., & Laney, T. O. (2014). Monetarism, budget deficits, and wage push inflation: the
cases of Italy. PSL Quarterly Review, 12(3), 321-345.