PRINCIPLES OF MACROECONOMICS 7

PRINCIPLES OF MACROECONOMICS 7

Principles of Macroeconomics

Q1). Economic measure

Income and GDP

GDP is measured by calculating the value of all finished goods that are produced in a country at a given period (Farmer, 2008). Income and GDP are used to measure development in a state and thus there is a need to differentiate between final and intermediate goods. For example, an orange sold to Caco Cola Company is not part of finished products whereas an orange sold to a store to be sold to the final consumer is a finished good.

But GDP is not a sufficient measure of economic growth as an independent tool. A good with higher quality or a new product may be introduced in business hence affecting the industry efficiently. Also, The gross domestic product does not take into account the leisure time expenses as well as the hard work of people to produce output is not easily put into consideration. In the present day jobs are less strenuous than the way they were in the past, and yet Gross Domestic Product does not consider these factors.

Businesses that are transacted outside the marketplaces and these activities are not included in the Gross Domestic Product records. The underground companies may be legal or illegal and may be done to escape taxes or arrest. Non-market products are goods that are produced but cannot be sold out for the exchange of money, and they are not put in a measure, and yet they carry value. This limitation makes GDP and income fail to effectively illustrate the level of the economy and thus cannot be used in the solely be used as an economic measure.

Q3) Difference between the aggregate demand curve/aggregate supply curves and market curves

The factors used in establishing a market curve are different from the ones used in determining a total demand curve (Canto, Joines & Laffer, 2014). Demand curves are usually placed in a graph that has a vertical side at the right-hand side which represents one factor, for example, the price and the bottom has a horizontal axis that represents the second factor for instance quantity. Also the curve in a market demand curve slopes from the right side to the left representing the law of demand while the aggregate curve mainly represents other additional factors.

The law of demand actualizes the fact that people prefer cheaper items compared to the expensive ones. When the demand curve slopes from right to left it shows that very few people buy the goods when the price increases and more products are sold when the price is lower. In the market, the curve has prices on the vertical axis and quantity in the horizontal axis whereas the aggregate demand curve where values of price and quantity demanded vary, and this gives the curve a negative slope.

Q6) supply-side economy

According to supply-side economy, consumers buys more when the cost of taxes is low, and this results in economic growth (Black, 2018).

Figure 1: Tax incident

The above figure shows the reduction in quantity demanded when a tax of $ 2 is imposed in the economy. The deadweight is the total quantity lost, and s1 is the new supply curve. Imposing tax also increases the price of goods and prices.

Q1) Income approach and expenditure approach

The income approach is measuring the GDP of a country by summing up the total income of households while the expenditure approach entails the use of total household expenditure on final goods and services to measure GDP. Value added is the measure of whole products produced in an industry subtracted by intermediate goods (Mankiw, 2014). Amount added is significant in income approaches as it helps in balancing out items on the national level.

Market value

Farmers added value =$0.30

Price-Miller sold the =$0.50

Value added by product = 0.50-0.30=$0.20

Price, the whole seller, sold the product =$1.00

The value that the whole seller added =1.00-0.50=$0.50

Product price at the grocery =$1.50

Grocery added value =1.50-1.00=$0.50

Final market price= 0.30+0.20+0.50+0.50= $1.50

Expenditure approach GDP

Q2

2a). GDP Value

GDP = consumption + investment + government spending + (exports-imports)

Thus;

$200 + $40 + $50 + ($30 – $40) = $280 Billion

2b). Net Domestic Product (NDP)

Net Domestic Product = gross domestic – depreciation

Thus;

$40 – $10 = $30

2c). Net Investment (NI)

Net investment = gross investment – depreciation

Thus;

$40 – $10 = $30

2d. Net Export (NE)

Net Exports = value of exports – the value of imports

Thus;

$30 – $40 = -$10

Q8 Customer price index

Product

Market basket quantity

Base year price

Basket cost in the base year

Prices in the current year

Cost of the Basket in the current year

Twinkies

365 packages

$0.89

$324.85

$0.95

$346.75

Fuel oil

500 gallons

1.00/gallon

500.00

1.25/gallon

$625.00

Cable TV

12 months

30.00/month

360.00

15.00/month

$180.00

$1,184.85

$1.151.75

Thus;

Twinkies current year consumer price index is 106.74, and its % change is 6.74% increment;

Fuel oil current year consumer price index is 125.0, and its % increase is 25% then the cable TV has a current year consumer price index at 50.0, and its % increase is 50%.

References

Black, D. (2018). The incidence of income taxes. Routledge.

Canto, V. A., Joines, D. H., & Laffer, A. B. (2014). Foundations of supply-side economics:

Farmer, R. E. (2008). Aggregate demand and supply. International Journal of Economic Theory.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.