Question

a) Calculate the GDP using only those numbers that may be relevant from the following numbers

Consumption                                                              $60B

Government purchases                                               $10B

Taxes                                                                          $15B

Private Sector Gross Investment                                $10B

Savings                                                                       $10B

Imports                                                                        $6B

Exports                                                                        $8B

b) Describe using examples the three types of unemployment we generally come across and which of these are included in the definition of natural unemployment. (Minimum 100 words)

c) Why do we use real indicators like Real GDP and Real Interest Rate rather than the nominal indicators while examining the trends in the economy? (Minimum 50 words)

Answer 1

a)

GDP (Y) using expenditure method is given by

Y = Consumption + Private investment + Government expenditure + Exports - Imports

Y = 60B + 10B + 10B + 8B - 6B

Y = $82B

b)

In general, an economy suffers from 3 types of unemployment:

• Structural unemployment: This occurs when there exists a gap between the skills one has and the skills an employer needs. A typical example is a case of people employed with automotive manufacturing. The increased amount of automation has meant that their skills are no longer needed in the first place.
• Cyclical unemployment: This type of unemployment pertains to the unemployment arised due to the upward and downward swings of the economy. When the economy slumps, the output decreases means there is a need of slacking offFrictional unemployment: It refers to the unemployment during the time between one job and another under normal conditions. The reasons are abstract for this type of unemployment. Voluntary quiting of jobs comes under this category as well. some employees.
• Fictional unemployment is the unemployment during the time between one job and another under normal conditions. Voluntary quiting results in these

According to the definition of natural unemployment, structural and frictional unemployment come under this category.

c)

Nominal GDP is used when we are comparing different quarters of output within the same year. But when comparing GDP for more than one year, economists real GDP is preferred because it removes the effects of inflation and declation from the equation. Therefore the comparison shows just the change in output volume between the years.

Same goes in with real interest rate. The investors get an idea about the rate they will receive after accounting for inflation through real interest rate. Nominal rate doesn't work that way. It accounts for the inflation and the deflation.

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