Measuring a Nation’s Income, Essay Example

The study of how firms and households formulate economic decisions and interact in markets is microeconomics while Macroeconomics is the study of economy wide phenomena including unemployment, economic growth, and inflation. Gross Domestic Product (GDP) measures the total income of everyone in the economy and the total outflow on the economy’s production of goods and services. The GDP is measured by the market cost of all final goods and services produced inside a nation in a given period. The constituents of GDP are investment, consumption, government purchases and net exports (Y=C+I++NX). Nominal GDP is the cost of goods and services appreciated at current market prices.  Real GDP is the production of goods and services valued at constant prices. The GDP deflator measures the present level of prices comparative to the level of prices in the base year. Inflation rate is the proportion change in a measure of the value level from one period to the next

Measuring the Cost of Living

Consumer price index (CPI) is the measure of the overall cost of goods and services purchased by a typical consumer. The producer price index (PPI) is the estimate of a basket of goods and services bought by firms. Problems in measuring the cost of living include the substitution bias, introduction of new goods and unmeasured quality change. The variation between the GDP deflator and the CPI is that while the GDP deflator contrasts the price of presently produced goods and services to the cost of same goods and services in base year, CPI compares price of a fixed basket to the price of the basket in the base year. Nominal interest rate is interest rate without the correction for the effects of inflation. Real interest rate is interest rate corrected for the effects of inflation.

Production and Growth

Productivity is the quantity of output produced from each unit of labor input. It is important because it is the key determinant of living standards. It is determined by the physical capital, human capital, natural resources and technological knowledge. Savings and investment raise future productivity.

Higher savings rate means more resources to make capital goods rising productivity. The curve results to be more flatter due to diminishing returns. Diminishing returns refers to the benefit from an extra unit of an input. It declined as the quantity of the input increases.  Catch up effect means that the countries that start off poor tend to grow more rapidly than countries that start off rich. Ways in which policy makers can foster economic growth is through allowing investment from abroad, investing in human capital through education, improved health and nutrition, protecting property rights and promoting political stability, free trade, controlling population growth, and promoting technological progress.

Savings Investment and Financial Systems

Financial system is a group of institutions in the economy that help match one person’s savings with another’s investment. Financial institutions comprise the bond market and the stock market. Financial intermediaries are financial institutions where savers can indirectly provide funds to borrowers. They include, banks, mutual funds, a closed economy does not interact with other economies while an open economy interact with other economies. The supply and demand of loanable funds depends on the interest rate. Quantity demanded declines and supply increases with a rise in interest rate.

Supply of loanable finances originates from national saving which includes both public and public saving. Demand for loanable money comes from household and firms that need to borrow for the purposes of investment. The equilibrium is where the both the quantity of funds demanded and supplied at similar interest rate is equal.  Savings incentives increase the supply of loanable funds. This is so as an increase in tax incentive lowers the interest rate, increasing the level of funds invested and saved. Investment incentives augment the demand for loanable funds. If firms are motivated to invest more, the demand for loanable finances increases. This results to rise in interest rate which would consequently stimulate saving. An increase in government deficit lowers national saving. Loanable finances decrease. It creates the crowding out effect.

Unemployment

The labor force refers to the total number of workers both employed and unemployed. Unemployment is measured by the unemployment rate and labor force participation rate. The natural rate of being without a job is the typical rate of unemployment. Cyclical unemployment is the divergence of unemployment from its regular rate.

Over the past many years, more women have entered the labor force, and men have left it. Structural unemployment is an outcome of a number of jobs accessible in some labor markets. Frictional unemployment is a consequence of the process of matching job and workers.

The unemployment insurance partially protects workers’ proceeds. It augments frictional unemployment. Structural unemployment is an outcome of insufficient number of jobs for the number of workers. Minimum wage laws can result to unemployment. At equilibrium the quantity of labor supplied is equal to the quantity demanded. When wages are forced to stay due to minimum law wage, above the equilibrium level, the quantity of labor supplied increases. Collective bargaining is the procedure in which unions and firms concede on the conditions of employment. Unions aid firms to respond efficiently to laborers’ concerns.