GDP -- the Production of a Pound Essay

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GDP -- the production of a pound of hamburger or the production of a pound of caviar? Why?

According to the commonly used Expenditure Method of calculating GDP, the production of a pound of caviar would contribute to a nation's GDP than would the production of a pound of ground beef. The Expenditure Method calculates GDP as follows:

GDP = Private Consumption + Gross Investment + Government Spending + The difference in net exports and net imports.

Noting the simplified nature of this equation, the production-based contributing group is identified quite clearly as gross investment. This category includes all of the necessary inputs required in producing a certain good (caviar in this case). Being that caviar can be considered a luxury item, and costs much more that hamburger meat, it is safe to assume that its production is equally costly. Therefore, while the entire ground beef industry may have the potential to contribute more to a nation's GDP on a grander scale relative to the caviar industry. But, noting the high cost of caviar and its classification as a luxury item, the per pound contribution of caviar is far greater than the per pound contribution of cheaper hamburger meat.

2. Define real GDP and nominal GDP. Which is a better measure of economic well-being? Why?

The key difference between real GDP and nominal GDP is the consideration of inflation in calculations. Real GDP figures represent a nation's gross domestic production relative to real rates of inflation, whereas nominal GDP numbers do not take into account inflation rates. Without question, real GDP is a much better macroeconomic performance indicator than its nominal counterpart. For while the actual figures are relevant, they mean little if they are not accurately comparable to previous years and competing nations. By including inflation rates in GDP calculations, nations are able to precisely assess their historical performance and more appropriately determine corrective action when the need arises.

3. Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.

a. Is the real interest rate (i.e., nominal interest rate less the expected rate of inflation) higher or lower than expected?

In this case, the real interest rate would be higher than the two parties expected. While the nominal interest rate is fixed and does not include inflationary data, the real interest rate takes into account the unforeseen surge in inflation rates. Thus as currency loses its value during this increase in inflation, the real interest rate would rise to maintain the initial nominal interest ratio.

b. Does the lender gain or lose from the unexpectedly high inflation? Does the borrower gain or lose? Explain your answer.

The lender would certainly lose in this case because he or she is being paid less, in real terms, than what the initial agreement dictated. Knowing that the currency has lost value during the period of increasing inflation, the interest the lender is receiving is also thereby diminishing in value. Thus, while the lender is suffering in real terms, the borrower is being rewarded with decreasing expenses. In simple terms, the borrower is gaining while the lender is suffering.

4. How would an increase in the world price of oil affect the amount of frictional (i.e., temporary) unemployment? Is this unemployment undesirable? What public policies might affect the amount of unemployment caused by this price change?

An increase in the worldwide price of oil could negatively affect the amount of frictional unemployment. That is, such a global increase in the price of oil would likely represent an increase in costs realized by almost all firms. Therefore, firms would abstain from hiring new employees and unemployment figures would grow. While frictional unemployment is always present, growth in this area is certainly undesirable. For, while this group of jobless individuals is created on a temporary basis, a lack of employment opportunities can quickly turn this into a much more permanent and detrimental situation.

Government policies like oil-drilling moratoriums and anti-oil legislation would certainly have a negative affect on unemployment figures in the short-term. That is, as the oil industry would presumably shrink in such environments, jobs would certainly be lost and unemployment numbers would grow. However, this would likely be beneficial in the long-term by liberating the nation's employment data from its dependence on the price of oil. What is more, aligning the aforementioned policies with alternative energy initiatives would help to offset the jobs lost in the oil industry by creating new jobs in this more promising sector.

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5. Are the following workers more likely to experience short-term or long-term unemployment? Explain.

a. A construction worker laid off because of bad weather.

Without question, this type of laborer is far more likely to experience short-term unemployment. Knowing that the weather changes very regularly and that the worker presumably possesses the skills necessary to complete the task at hand, this unemployment situation should soon be remedied.

b. A manufacturing worker who loses her job at a plant in an isolated area.

This worker is much more likely to experience long-term unemployment. This is because it is highly likely that she lives within a close proximity to the relevant facility. And being that this particular manufacturing plant is located in an isolated area, it is likely that she will be required to relocate in order to secure further employment. As this process is typically very time-consuming, there is a much greater likelihood that this individual will experience a longer duration of unemployment.

c. A horse-drawn wagon industry worker laid off because of competition form railroads.

This unfortunate soul will likely experience long-term unemployment. This is because he or she has a background in a dying (or dead) industry. Knowing the diminishment and lack of growth in the horse-drawn wagon industry, it is unlikely that this individual will find another position in this field. Therefore, this person will have to invest in education or training in order to become qualified for other work. As this process is often very time-consuming, there is a much greater likelihood that this individual will experience a longer duration of unemployment.

d. A short order cook who loses his job when a new restaurant opens across the street.

In this situation, the recently unemployed cook is not likely to be unemployed for very long. That is, knowing that this individual possesses the skills necessary for success in the restaurant industry, and noting the collective popularity in restaurants around the world, it will probably be quite easy for this person to find another job. Thus, with his knowledge of his craft and the inelastic demand for restaurant workers, it is most probable that this man will experience short-term unemployment.

e. An expert welder with little formal education who loses her job when the company installs automated welding machinery.

The presence and emergence of automated welding machinery is a good precursor of the fact that this individual is likely to experience long-term unemployment. While she may be able to find further employment in the short-term at a facility that has yet to install automated equipment, the advancement of such technology indicates that the welding industry is a diminishing field of employment. Therefore, this person will have to invest in education or training in order to become qualified for other work. As this process is often very time-consuming, there is a much greater likelihood that this individual will experience a longer duration of unemployment.

6. What are the primary factors contributing to a country's standard of living? Identify the factors and explain how each affects a nation's living standards. How would an increase in capital gains taxes impact the standard of living? Explain your answers.

The two primary factors that contribute to a nation's standard of living are real per capita income levels and poverty rates. In the case of the former, this figure indicates what the average citizen earns over a given period. Thus, the income an individual is able to spend will ultimately determine the standard to which he or she is able to live. A nation's poverty rate has the same cumulative effect, though this data figure represents those who fall below a globally defined minimal living standard. Without question, high poverty rates will have a directly adverse affect on a country's overall standard of living.

An increase in capital gain taxes might lessen a country's standard of living in the short-term, because it would be essentially lowering collective income rates. Though, this increase in governmental revenues could also help to bolster a country's standard of living in the long-term if the government were to use these funds to strategically invest in areas that would help to heighten living standards.

7. Name at least three ways that government policy makers increase a nation's living standards? Be specific and explain how the methods you cite impact living standards.

One way in which government policy makers could help to increase a….....

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