GDP Market Basket & Inflation of Different Nations- Economics Assignme

Questions : 1. (a) What is the GDP gap? (b) Explain why comparing the GDP's of various nations might not tell you which nations people are better off. 2. (a)Whatis the "market basket" used by the Australian Bureau of Statistics? Why does the "basket" of goods have to change over time? (b) Give two examples ofhow the "market basket" has changed over time. 3. During the periods of economicdownturneconomists often note that the unemployment rate falls. They attribute this to the "discouraged worker effect". (a) Define an "unemployed person" (b) What is the "discouraged worker effect"? (c)Why does this drop in the unemployment rate signal bad news? 4. (a) Define the term "inflation". (b)Inflation has different effects for different groups of people. Who benefits and who loses out from inflation? (c)It is generally accepted that there are two broad types of inflation, demand-pull inflation and cost-push inflation. Describe both the cause and effect of each. Answers : 1. (a) GDP Gap GDP gap indicates the difference between the actual output of the nation and the potential GDP of that same economy. GDP gaps helps in denoting the quantity of production that is irretrievably lost by the economy. The capability of greater level of production is not utilized as there were inadequate jobs. Hence, GDP gap indicates that the economy is not operating efficiently and resources remains unutilized (Krugman Wells, 2005). (b) Comparison between GDP of different nations In simple terms, GDP helps in estimating the financial value of the finished products within the nation in a particular time frame. Comparing the GDP of different nations, an idea regarding the economic activities can be measured. However, it does not accurately estimate the standard of living of the entire population of the nation, their capabilities, level of income and efficiency levels. Hence, it can be concluded that comparing the GDP of different nations, the nations having better people cannot be identified (Taylor Frost, 2006). 2. (a) Market Basket Australian Bureau of Statistics uses market basket for estimating the consumer price index (CPI) in order to estimate inflation of the households in Australia. ABS considers a simple approach for estimating CPI in which it imagines a basket of goods as well as services which is bought by the households of Australia. It is imagined that basket is bough in each quarter. The prices of the goods and services change in different quarters. Thus, the total price of the basket changes and CPI estimates the change of the price of the market basket (Abs.gov.au, 2015). (b) Changes in the items of market basket The items in the basket changes over the time as the demand for all the items are not same throughout the year. The consumption of goods varies with different season. In the inflation basket of 2012, tablet computer has been added. Additionally teenage fiction such as series of Twilight has been added to the basket. On the other hand, step ladders etc have been removed from the basket. Charges for developing and printing color film were removed as the popularity of digital camera is increasing (Rogers, 2012). 3. (a) Unemployed Person A person will be tagged as unemployed who is fifteen years of age or more and is not employed during the reference period (week). Additionally, the person who is actively looking for full time or part time job in the 4 weeks till the end of the referred week and ready to work immediately or waiting to join a new work within 4 weeks from the end of the referred week. In simple terms, a person who is actively searching for jobs and not able to find one till date is an unemployed person (Abs.gov.au, 2015). (b) Discouraged Worker Effect A discouraged worker is a person who is an unemployed person who has given up looking for jobs as he is unable to find work. It has been observed that older people, fresh graduates and minorities are majorly discouraged workers. In this situation, the person feels that there is no job available (Hubbard O'Brien, 2006). Discouraged worker contributes in increasing the overall employment rate of the nation. The discouraged worker effect has a negative impact on the economy of the nation (Krugman Wells, 2005). (c) Implication of Drop in Unemployment Rate Unemployment rate is negatively correlated with the Decline in the unemployment rate implies that the inflation rate is increasing (Krugman Wells, 2005). Increase in the inflation rate leads in increasing the price level of the products. Thus high level of inflation has a negative impact on economy. Hence, drop in unemployment rate indicates a bad news (Hubbard O'Brien, 2006). 4. (a) Inflation Inflation can be defined as the consistent increase in the price of goods and services in an economy for a specific period of time (Krugman Wells, 2005). (b) Impact of Inflation of Different Groups of People Inflation has different impact on different group of people. It has been observed that with the increase in price, the sellers and manufacturers earn higher profit. Additionally it helps in increasing the wage and declines the unemployment rate (Taylor Frost, 2006)Additionally, inflation helps in boosting growth of the economy. On the other hand, with the increase in price level, the purchasing power of the consumers decline (Perloff, 2004). (c) Demand Pull Inflation and Cost Push Inflation Demand pull inflation leads to increase in price level of the products due to the high demand in the economy. It implies that the disposable income increases in that economy. Demand pull inflation helps in increasing the GDP and unemployment rate declines (Perloff, 2004). Cost push is the second type of inflation which is facilitated by the rise in the price level of the inputs such as raw material, machineries, labor etc. Thus, the increase in price level of the input increases the price of output as well as declines the supply in the market (Hubbard O'Brien, 2006). References Abs.gov.au,. (2015).6202.0 - Labour Force, Australia, Feb 2012. Retrieved 10 January 2015. Abs.gov.au,. (2015).6401.0 - Consumer Price Index, Australia, Sep 2014. Retrieved 10 January 2015. Hubbard, R., O'Brien, A. (2006).Microeconomics. Upper Saddle River, N.J.: Pearson Prentice Hall. Krugman, P., Wells, R. (2005).Microeconomics. New York: Worth. Perloff, J. (2004).Microeconomics. Boston: Pearson Addison Wesley. Pindyck, R., Rubinfeld, D. (2005).Microeconomics. Upper Saddle River, N.J.: Pearson Prentice Hall. Rogers, S. (2012).Inflation basket of goods 2012: full list of what's out and what's in.the Guardian. Retrieved 10 January 2015. Taylor, J., Frost, L. (2006).Microeconomics. Milton, Qld.: John Wiley Sons Australia.