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Economics - some definitions? 1a) What would it mean to be told that a country’s GNI was greater than its GDP? GNI and GDP are measures used by country’s to collect data in a systematic way. The National income Accounts give information on how an economy is functioning as a whole. GNI measures the Gross National Income of a country; this is the income of its residents from investments in the country, as well as returns from investments they have made outside of the country. Hence companies like Marks and Spencer has income from its British stores, and stores in other countries. Whereas GDP measures the Gross Domestic Product measures income from all companies in a country, regardless of nationality. This includes companies lie Daewoo who although are not British do turn over money in this country. If a country had a greater GNI this would show that country was making more from its own Nationality companies than foreign ones, i.e. its external market is larger than its domestic one.
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b) Is GNI or GDP the more appropriate target for government policy? GDP is more important to governments because this is the amount of money that is being spent in the home economy. Money from these companies is being injected in to the home economy, which helps to raise the nations living standards. Whilst GNI measures money that does not necessarily come back in to the home economy, therefore is aiding foreign economies. So GDP is more important to a government in order to provide money directly in to its own economy. 2a) How does a consumer price index cope with the changing pattern of household spending? The government employs people to collect data monthly (price collectors), who mark any rise in price, highlighting inflation. This is done with a basket of goods and services, and the relative values of items are measured in relation to household spending. Furthermore a base period level off prices is marked every decade. b) What do 1) RPI and 2) GDP deflator measure? The RPI stands for Retail Price Index, and is the most commonly used measure of inflation. It is sometimes also called headline inflation as it measures inflation that newspapers most commonly report on. This is inflation that affects average household spending. It measures retail prices (price of goods in shops), and the price of services bought by a household. New figures are published every month, however due to the scale of doing this, goods and services are carefully chosen and measured to represent the broader spectrum. This sample is referred to as a ‘basket’ of goods, which price collectors measure and the information given to the office of National Statistics. Each good has a relative importance, and is weighed according to its significance in household spending. The GDP Deflator is used more commonly than the RPI, however it is less important to the average household. The GDP Deflator and RPI both have a tendency to overstate inflation, whilst the RPI fluctuates more as well. |
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3) Draw aggregate demand and aggregate supply diagrams to show the initial effect on he UK’s price level of each of the following. For each of these I will use the following formula as a guide, AD = C+ I + G + (X-M) a) The government builds some new schools. (Please see diagram fig 1) b) There is a recession in the US. (Please see diagram fig 2) c) New computer technology increases productivity in the manufacturing industry. (Please see diagram fig 3) company will become more capital-intensive leading to an increase in employment. The Aggregate supply curve will shift to the left and the Aggregate demand curve will shift to the left. Causing a decrease in price level. 4) Explain why each of the following statements is incorrect. a) In 1999 ‘Crummy Movie’ earned 20million more at the box office than ‘Gone with the Wind’ has earned over the last 60 years, therefore ‘Crummy Movie’ is already a bigger box office success. The statement can be seen as incorrect because ‘Crummy Movie’ made 20 million at 1999 prices. Whilst ‘Gone with the Wind’ is 60 years older, and hence would have seen much smaller box office receipts due to a much lower price. The statement therefore does not take in to account inflation and the relative price of the good to the time it is sold at. Hence in real terms ‘Gone With the Wind’ would have probably taken more. b) Unemployment is always a bad thing. Unemployment cannot always be seen as a bad thing because it can be used as a tool to motivate people. If people believe that they may face unemployment, and hence a downturn in their living standards they will strive to work harder, and be more efficient. High unemployment can also have the negative effect of creating low Aggregate demand, and so inflation is low. In this situation companies will find it easier to predict how prices will change in the future. However Unemployment can be a bad thing because not all people in the economy are working and so this is inefficient, as they are not maximizing the production possibilities frontier. And the negative effect of discouraging people that are working because they have to pay taxes which aids these people through welfare. c) If both the labour force and the capital stock are increasing by 2% a year, then real output cannot increase by more than 2% a year. The statement is incorrect because it does not take in to account an increase in returns, or capital stocks that could be caused by a shift in the market of advances in techniques for example. Therefore if a company could become more efficient, an improvement in its production possibilities frontier would lead to a greater than 2 % increase each year. 5) Explain three of the following terms. a) The natural rate of unemployment. This is the level at which there is full employment, or the labour market is in equilibrium. There is a natural rate of unemployment when those unemployed are no better than the people who have jobs and so deserve to keep them. Hence there is market equilibrium of employment, which does not mean full employment. b) Adaptive Expectations. This is when people make educated guesses about the future based on previous events. Previous events are seen as a guide for adaptive expectations on what inflation in the future will, and should be. Short term an increase in price is always believed, and so this implies output will increase, leading to upward Aggregate demand. c) Hyperinflation. This is when inflation can become destructive because it begins to make ages and savings worthless, as inflation goes up at a rate of more than 20%. The real value of money, and purchasing power is then severely reduced. People who have debts, usually younger, will see this as beneficiary. The harmful effects of hyperinflation are so apparent that one of the goals of macroeconomics is to maintain stable prices. |
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