Introduction to Macroeconomics Gross Domestic Product

Question: Discuss about the Introduction to Macroeconomics for Gross Domestic Product. Answer: 1.(a) The following data gives the macroeconomic data of a country for 2015 and to calculate the Gross Domestic Product of the desired country. The calculations are as follows: GDP calculation is done by taking the Expenditure Method of calculation GDP= Consumer Expenditure + Government expenses + Investment + Net Exports According to the Question, Net Exports= -21 Consumption Expenditure=627 Government Expenditure= 351 Investment=275 (All the amounts are in Billions and the currency of Dollars) GDP=627+351+275+ (-21) GDP= 1232 Billion $ The method used for the calculation of GDP is the Expenditure Method. Expenditure Method is the process of calculating gross domestic product by taking into consideration the total consumption, investment, net exports and the expenditure of the government. It is the most common and simplest way to predict the GDP of a country, and it includes the private sector like private organizations and individuals of the country specified. The method adds up the total financial worth of all the finished commodities and services within a specified time-period. Expenditure Method involves the nominal GDP this GDP is adjusted for the calculation of inflation to evaluate the real GDP. 1(b) An economy produces three commodities namely fish, crabs and coconuts. The base year is taken to be 2014, and the considered table provides the amount provided and the prices of different commodities. Thus the chain volume measure of real GDP in 2014 and 2015 expressed in base year is calculated as follows: Calculation of Nominal GDP 2014= (2000*20) + (600*10) + (500*10) = 51,000 2015= (2100*30) + (650*8) + (700*5) =71,700 Calculation of Chain Method (a)Quantity of 2014 * Price of 2014= (2000*20) + (600*10) + (500*10) = 51,000 (b)Quantity of 2015 * Price of 2014 = (2100*20) + (650*10) + (700*10) = 55,500 (c)Quantity of 2014 * Price of 2015 = ( 2000*30) + ( 600*8) + (500*5) = 67,300 (d)Quantity of 2015* Price of 2015 = (2100*30) +(650*8) +(700*5) = 71,700 Therefore, GDP growth rate with 2014 (b-a)/a*100= 55,500-51,000 /51000*100 = 8.82% GDP growth rate with 2015 (d-c)/c*100= 71,700-67,300/67,300*100 = 6.53% Therefore Average Growth Rate = 8.82+6.53/2 Chain Method GDP = 7.675% The calculation of Real GDP growth rate between 2014 and 2015 is: GDP of 2014 + (GDP of 2014*Chain Method) = 51,000 + (51,000* 7.67) = 4,42170$ 1(c) The following are the statistical data from Australian Bureau for 2015 and the expected data are: Labor Force participation rate: 69.6% Working-age population: 18,429,726 Employment-to-population ratio: 65.2 Therefore, the labor force calculation from the following data are as follows: Participation Rate=Labor Force/Working Age Population So, Labor Force= Participation rate* Working-age population = 65.2* 18,429,726/100 Labor Force= 12016181.3 (in thousands) 1(d) The calculation of employment from the above data is: Employment rate= No of people employed/ Total population = 12016181/18,429,726*100 = 65.1% 1(e) A family on Sandy Island consumes only juice and cloth. The family spent $40 on juice and $25 on fabric. The price of juice on the base year is $4 per bottle and cloth was $5 a length and of the current year is $4 a bottle and $6 a length. The calculation of CPI in the current year is calculated as: CPI for juice = (Base year quantity* Current year price/Base year quantity*Base price) * 100 = (40*4/40*4)*100 =100 CPI for cloth= (25*6/25*5)*100 = 120 1(g) The calculation of the Inflation rate according to the data from the previous question are: Inflation Rate of juice= CPI of this year- CPI of last year/CPI of the last year*100 =100- 40/40*100 =15% The Inflation rate of the current year is 15% which suggests that the rise in the price of all the commodities (juice and cloth) will increase by 15% from last year resulting in the increase in expenditure for the family dwelling in Sandy Islands. 2(a) The European Union started to expand money for the welfare of the countries associated with the European Union. They began creating money by 60 billion euros every month in the open market to create a sound financial structure. The following impacts can take place in the economic sectors in the European Union and the global financial market: Money Supply: The European Union increases the creation of money by 60 billion euro which enhances the amount of money in the financial market resulting to the excess money in the market which in turn increases the purchasing power of the consumers. The increase in money supply will promote the infrastructure of the financial market of every country resulting to the overall development of the economy. Interest Rate: The introduction of new money in the market will lead to the lowering of market interest rates. The level of liquid money supply equals with the total demand for liquid money to determine the interest rates. The interest rate in the economy increases with the increase in money creation due to the consumers getting attracted towards taking loans from banks with excess money in the market. Investment: The investment in the market increases due to the high money supply in the economy leading to rising in income and money supply in the hands of the consumers which attracts them to invest more in the market either for satisfying their human wants or through financial investments to earn more income. Even the industries and financial institutions are attracted to invest more in the share markets. The consumers in search of earning extra income will invest more in the market making the market more advantageous and economically more stable. Consumption: The consumption power of the consumers will rise rapidly due to increase in income of the consumers. The introduction of new money will lead rise in income of the consumers, which directly will increase the purchasing power of the consumers. When the purchasing strength of the individuals increase, this will lead to higher demand for the goods and services thus increasing the consumption rate of the consumers in a country. Thus an increase in use will lead to the growth of the request which will also result in the rise in supply. Thus an increase in consumption directly increases the demand and supply in the economy. Economic Growth: The introduction of new money in the market directly influences the economy because of the fact that new funding introduction leads to the increase in consumption of the individuals and also generates high demand and supply in the market. The money creation also helps to improve investment in the market and leads to capital gain for the organizations as a whole. The improvement in the standard of living of the consumers along with good profit margins of the industries is a significant sign for economic growth as a whole. 2(b) The quantity expansion of euro in the European Union will increase the value of the euro in the market due to a good amount of availability of euro in the market and also in the hands of the consumers which will not only lead to the development of the economy but will also influence better financial structure. A competitive advantage over the financial market will lead to higher investments, which will improve the value of Euro in the economy. The increase in the value of Euro in the market will appreciate the currency in the market. The high quantity of money introduction in the economy will increase the interest rates and will also generate a strong demand and supply of consumer goods. The high demand in the market will lead to greater supply of goods and services and will thus result in higher import and export 2(c) The interest rate of USA is likely to change because of change in the economic indicators. But the interest rates of the European Union and Australia has decreased appreciably. Thus a change in the interest rate will modify the flow of funds in the short run because in the short term the differentiation in interest rates will create deficit and surplus of flow of funds in the economy. The rise in interest rates in the USA will create a surplus fund in the capital market whereas Australia having a little interest will not offer much investment thus import and export resources will not be possible because the value of Australian has fallen on dollar in the USA. The net flow of funds between the countries will not be encouraged. 2(d) The rate of interest is determined by the equilibrium between supply and demand of money. It is the meeting point of demand and supply of loanable funds that determines the interest rate. Loanable funds are available at higher interest rates and vice versa, and thus the loanable fund flow will decrease from the USA to Australia. The fall in the interest rate of home loans will increase the demand for housing, and thus house prices will rise considerably. The rise in demand of households will put a heavy burden on the household debts of Australia because fall in interest rates has attracted consumers to take loans but due to less flow of loanable funds, the household debt will rise creating a burden on Australia. 2(e) The increase in interest rates of USA will affect the Australian dollar because the rise in interest rate will decrease the value of the dollar in Australia because the rise in interest rate in the USA will appreciate the value of currency thus reducing the value of Australian currency on the USA. The exchange rate of Australia about the USA will increase due to falling in the value of the currency of Australia on the USA. Decreasing interest rates will increase the exchange rates because lower interest rates will not attract foreign capital in the economy. 3(a) Due to the increase in the exchange rate on Japanese yen and USA dollar, the quantity of Japanese yen will fall because a fewer dollar will be able to buy more of yen in the market. As a result, people now will sell Japanese yen in the foreign market to abstain from loss. 3(b) The increase in interest rates of USA will affect the Australian dollar because the rise in interest rate will decrease the value of the dollar in Australia because the rise in interest rate in the USA will appreciate the value of currency thus reducing the value of Australian currency on the USA. The exchange rate of Australia on the USA will increase due to falling in the value of the currency of Australia on the USA. Decreasing interest rates will increase the exchange rates because lower interest rates will not attract foreign capital in the economy. Thus the flow of fund between both the countries will get affected, and the flow of fund from USA to Australia will fall. The current account balance of USA will rise due to higher interest rates as there will be more flow of foreign capital in the market with the expectation of higher income from investment. Thus increased interest rate will lead to higher current account balance of the country. 3(c) The calculation of current account balance is shown by the following formula: CY= (Export-Import)+ Net income from abroad+ Net transfer = (1853-2561)+ 655+ (-125) = -72 Current Account refers to the sum total of the balance of trade, factor income and investments from abroad deducted by investments in abroad. It is known as current account as it deal with the current transactions of a country. 3(d) The calculation of current account is given below: Capital account= transfers received by the country- transfers given out by the country = 421-834 = -413 Capital Account refers to the net reform in the financial asset of a nation. Capital Account along with the current account represents the balance of payment of a country. 3(e) The official reserve of US did not increase because it shows a negative balance in the current account and in the capital account. 3(f) US in this year is a net lender because all the balance of payments calculated in current and capital accounts shows negative balances in the current financial year. Reference List Barsky, R., Justiniano, A. and Melosi, L., 2014. The natural rate of interest and its usefulness for monetary policy.The American Economic Review,104(5), pp.37-43. Barsky, R., Justiniano, A. and Melosi, L., 2014. 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