Economics Assignment

This economics assignment covers various topics including GDP calculation using the expenditure method, the impact of government spending on the economy, consumer price index calculations, and types of unemployment. It includes detailed explanations and references to support the analysis, making it a comprehensive resource for students studying economics.

Running head: ECONOMICS ASSIGNMENT
ECONOMICS ASSIGNMENT
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Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................5
Question 3..................................................................................................................................6
Question 4..................................................................................................................................8
References................................................................................................................................10

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Question 1
Here GDP is to be calculated by following the expenditure method. Expenditure
method calculated gross domestic product (GDP), which totals consumption, investment,
government spending and net exports.
GDP(Y) = C+I+G+(X-M)
Where C=Private Consumption
Private consumption is also called personal consumption. It mainly shows consumer’s
expenditure on personal goods and services. Thus it includes all the aspects of the
expenditure that are borne by consumers. Expenditure on goods and services occurs when
that good is purchased , however consumption can last for several years depending upon the
durability and the degree of satisfaction it is providing to the consumer (Ilzetzki, Mendoza &
Végh, 2013) (Farmer, 2012).
I=Gross investment
Gross investment mainly shows the amount of sum that is spent by an economy on
capital assets. These capital assets may include property, technology. Machineries,
equipments and any other assets that straightly have the ability to improve production
capacity of an organization (Anghelache, Manole &Anghel, 2015)..

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G=Government spending
Government spending shows the expenditure that is incurred by government. This
spending by government can be financed by several factors of the economy and these can be
borrowing by the government, printing of paper money and the revenue earned by the
implementation of taxes. Changes that occurs in government spending is an important
component of fiscal policy and it is used to stabilize the macroeconomic condition of an
economy (ERASLAN & TOZLU, 2016.
X=Exports
An export is a matter of international trade that take place between countries , it
mainly shows the exchange of good and these goods which are used in export are produced in
the home country while exported to foreign countries. It is regarded as a crucial component of
an economy and this is due to the fact it facilitates international trade and this international
trade results in formation of economic growth in an economy and this formation in turn
increases employment opportunities, increases production that helps to achieve desired goal
set up the organizations and finally raises the government revenue (Behrens, Corcos & Mion,
2013).
M=Imports
Imports again show the exchange of goods and services but here the case is a reverse
one. Import involves exchange of goods and services that are produced into international
country to home country. It is also backbone of an economy and this is due to the fact it
higher imports mean negative value of balance of trade (Salvatore, 2014).
Therefore in context of the question, GDP’s calculation is shown below:

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Table 1
To get the consumption following are added:
 Consumption Expenditure
 Household purchases of durable goods
To get investment following are to be added:
 Construction of new houses and apartments
 Business fixed investment
 Change in inventory (End of year inventory stocks minus beginning of year inventory
stocks)
To get government spending, Government purchases of goods and services is to be added.
To get net export, Export minus import and result is then added.
Therefore Y=$1200 billion
In the above calculation, Sale of existing homes and apartments and Government
payment of retirees not included. This is due to the fact sale of existing homes and apartments
were not produced in the current year, if it is included then GDP would suffer from double

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counting. Government payment of retires not included in the calculation since it is transfer
payment, these are not payments for purchasing goods and services but are payments that are
allocated to achieve social ends.
Question 2
Australian government if invest $90b in order to build a new Navy shipyard then this
will definitely impact Australian economy. This is shown below by using AD-AS framework.
Figure 1: AD-AS
The above diagram shows the change in aggregate demand and aggregate supply ,
price level remaining constant. Here the price is fixed at P1. Here the long run effect on
economy is considered, this is due to the fact government spending on infrastructure is
reflected in the long run. Here LRAS is the long run supply curve and AD is the aggregate
demand curve. The figure shows that long-run the aggregate supply curve is vertical and this

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is because changes in aggregate demand only cause a temporary change in an economy's total
output. Initially the economy was at point where GDP produced Y1 after the spending by the
government both the AD and LRAS shifted to the outwards and the new GDP level is
attained at Y2. Thus it can be observed that at fixed prices, government spending resulted in
increase in GDP level and this effect is a positive one (Skaug, 2013). Thus government
spending is encouraged as it will initiate economic growth of the economy.
Question 3
Answer a)
Table 2
In the above problem if the base year is considered as year 1 and subsequent year as year 2
then it can be shown that:
Year 1:
Expenditure on pizza=$200
Expenditure on rent=$600
Expenditure on car=$100
Expenditure on phone=$50

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The total nominal expenditure=$950
Year 2:
Expenditure on pizza=$220
Expenditure on rent=$640
Expenditure on car=$120
Expenditure on phone=$40
The total nominal expenditure=$1020
Here in this problem the quantity that are consumed did not change over time it remained
fixed
Therefore Consumer price index (CPI) year 2 i.e, the subsequent year= (1020/950)*100
=107.37
Inflation rate between base year and subsequent year = 7.37 percent
Answer b)
Household spending is the significant factor that influences aggregate demand (Skaug,2015).
Thus if family income rises 5 percent then the aggregate demand will increase.

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Figure 2
The above figure shows that AS is the aggregate supply and AD is the aggregate demand.
Now AD shifts to the outwards while AS remained same and this is because income
increased. As a result of increased income f
amily will spend more money and thus as a result economy’s price level will increase.
Question 4
Answer a)
Three types of unemployment are cyclical, frictional and structural.
Cyclical unemployment takes place when an economy suffers from contraction
period. Economy when is on expanding stage the level of unemployment is low but when
economy faces recession then many workers lost their jobs and these people owe to cyclical
unemployment. During the phase of recession number of unemployed workers is more than
that of number of job openings. This type of unemployment is heavily concentrated on the
economic activity.

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Frictional unemployment is that kind of unemployment which is always there inside
economy, this unemployment mainly occurs due to temporary transitions by workers who are
having inconsistent information. This unemployment depends upon dynamics of the
economy. This unemployment caused by workers who may not grab the job offer which are
not matching their skills , workers who quit jobs for good job for working other part of the
country and workers who quit company due to failing firms (Krolzig, 2013)..
Structural unemployment is more or less same as frictional unemployment, this
unemployment is linked with difference of jobs and workers due to scarcity of skills.
Structural unemployment depends on the social requirements of the economy and dynamic
changes in the economy. This unemployment mainly arises if technology advances and
certain skills become obsolete and thus companies lay off workers.
Among the three unemployment frictional unemployment is socially least costly since
it tends to be brief and create more productive matches between jobs and workers. This
unemployment is mainly a self choice of being employed thus its cost towards society is
much low as compared to the other two unemployment.
Answer b)
Traditional term business cycle is misnomer because:
Some period in the business cycle implies predictable period, and for this reason it
does give any reason to believe that this is the period in the business cycle. It is also believed
that business cycle is an inherent in the fundamental operation of the economy (Galí, 2015).
Forecasting peak and trough phase of economy is possible by using business cycle ,
this is mainly done by looking at the real GDP, inflation rate and unemployment rate of the
economy.

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References
Anghelache, C., Manole, A., & Anghel, M. G. (2015). Analysis of final consumption and
gross investment influence on GDP–multiple linear regression model. Theoretical and
Applied Economics, 22(3 (604), Autumn), 137-142.
Behrens, K., Corcos, G., & Mion, G. (2013). Trade crisis? What trade crisis?. Review of
economics and statistics, 95(2), 702-709.
ERASLAN, M. T., & TOZLU, A. (2016). Government Spending and Economic
Growth. TISK Academy/TISK Akademi, 11(22).
Farmer, R. E. (2012). The stock market crash of 2008 caused the Great Recession: Theory
and evidence. Journal of Economic Dynamics and Control, 36(5), 693-707.
Galí, J. (2015). Monetary policy, inflation, and the business cycle: an introduction to the new
Keynesian framework and its applications. Princeton University Press.
Ilzetzki, E., Mendoza, E. G., & Végh, C. A. (2013). How big (small?) are fiscal
multipliers?. Journal of monetary economics, 60(2), 239-254.
Krolzig, H. M. (2013). Markov-switching vector autoregressions: Modelling, statistical
inference, and application to business cycle analysis (Vol. 454). Springer Science & Business
Media.
Salvatore, D. (Ed.). (2014). National Trade Policies. Elsevier.
Skaug, H., Fournier, D., Bolker, B., Magnusson, A., & Nielsen, A. (2013). Generalized linear
mixed models using AD Model Builder. R package v. 0.7. 4. R Foundation for Statistical
Computing, Vienna, Austria.

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Skaug, H., Fournier, D., Nielsen, A., Magnusson, A., & Bolker, B. M. (2015). glmmADMB:
Generalized Linear Mixed Models Using AD Model Builder. R package version 0.7. 2.1.
2012.