Fundamental of Macroeconomics

ECON 102

Dr.Muhammad Jumaa

Assignment

Prepared by

Q.NO.1: Define the following

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the dollar value of all final goods and services produced within an economy in a given period of time.

Gross Domestic Product is the best measure of how well the economy is performing. Calculates GDP via administrative data, which are byproducts of government functions such as tax collection, education programs, defense, and regulation, and statistical data, which come from government surveys of, for example, retail establishments manufacturing firms and farm activity

Real GDP and Nominal GDP

Nominal GDP is the market value (money-value) of all final goods and services produced in a geographical region, usually a country.

Real GDP is a macroeconomic measure of the value of output economy, adjusted for price changes. The adjustment transforms the nominal GDP into an index for quantity of total output.

Nominal GDP measures the current dollar value of the output of the economy.

Real GDP measures output valued at constant prices.

Nominal GDP: The value of final goods and services measured at current prices is called nominal GDP. It is denoted by Y

Nominal GDP or Y = P y, where P is the price level and y is real output

Real GDP: The value of final goods and services measured at constant prices is called Real GDP. It is denoted by y

Real GDP or y =Y/P where P is price level

Per Capita Income (PCI)

Per capita income, also known as income per person, is the mean income of the people in an economic unit such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or Gross national income) and dividing it by the total population.

Per capita income is often used as a measure of the wealth of the population of a nation, particularly in comparison to other nations. It is usually expressed in terms of a commonly used international currency such as the Euro or United States dollar, and is useful because it is widely known, easily calculated from readily-available GDP and population estimates, and produces a straightforward statistic for comparison.

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100PopulationAdult

ForceLabour

Q.NO.2: A country has Labor Force (LF) of 155 million and out of total LF; 137 million are employed in different sectors of economy. Calculate the following?

Number of Unemployed

LF= Number of employed + number of unemployed

155 = 137 + number of unemployed

Number of Unemployed = 155- 137 = 18 million

Unemployment Rate (%)

Unemployment Rate

Unemployment Rate = (18/155) ×100 = 11.6%

Labor Force Participation Rate (%) if the population equal to 234 Million.

LFP

LFP = (155/234) ×100 = 66.2%

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Q.NO.3:

Different types of unemployment

Frictional unemployment is the unemployment that arises from normal labor turnover—from people entering and leaving the labor force and from the ongoing creation and destruction of jobs.

Structural unemployment is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs.

Seasonal unemployment is the unemployment that arises because of seasonal weather patterns.

Cyclical unemployment is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion

In an economy, 3% of the employed workers lose their jobs and 20% of unemployed workers during the FY 2012. Calculate the natural rate of unemployment in that economy

3% of employed workers lose their jobs (s = 0.03)

17% of unemployed workers find jobs (f = 0.17)

The natural rate of unemployment

ul= ss+ f

= 0. 030.03+0.1 7

=0.15=15 %

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Q.NO.4:

Inflation

Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole.

Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability.

Costs associated with inflation

Shoe leather costs: the resources wasted when inflation encourages people to reduce their money holdings .Includes the time and transactions costs of more frequent bank withdrawals

Menu costs: the costs of changing prices printing new menus, mailing new catalogs, etc. Misallocation of resources from relative-price variability: Firms don’t raise prices

frequently and don’t all raise prices at the same time, so relative prices can vary which distorts the allocation of resources.

Confusion & inconvenience: Inflation changes the yardstick we use to measure transactions. Complicates long-range planning and the comparison of dollar amounts over time.

Tax distortions: Inflation makes nominal income grow faster than real income. Taxes are based on nominal income, and some are not adjusted for inflation. So, inflation causes people to pay more taxes even when their real incomes don’t increase.

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