A Guide To Written Responses Macroeconomics

Question: Discuss about the Short Written Responses Macroeconomics. Answer: Introduction: Real GDP is one of the measures of economic performance of a country. Particularly, it is an economic indicator that specifies the value of all output that are produced within a particular year by a country. Although it is widely accepted, this measure is an unreliable indicator of the standards of living in a country. First, GDP overestimates the standards of living. It is assumed that higher GDP indicates higher standards of living (Buck 2008). However, higher economic growth may occur due to increased economic activities that may result in increased pollution, congestion in the cities and towns, and working more hours (Williams 2013). In turn, this conditions may lead to fatigue, poor health, and poor environmental conditions. Thus, real GDP is an unreliable indicator of living standards. Additionally, it ignores the black market as economic activities in this market are not included in its computation. Some nations have a significant degree of economic activities that are excluded because they do not take place in the formal market system, yet many individuals and families depend on them, thereby facilitating decent standards of living (Buck 2008). Notably, living standards are not solely about the consumption of services and goods. Typically, the key factors in living standards may entail the degree of democracy, freedom, and liberty of individuals, yet the real GDP indicator does not include this in its computation. Furthermore, leisure, which is a major contributor to the quality of life is excluded in the computation of real GDP (Pettinger 2008). Unemployment is a condition in the economy where individuals who are able and willing to work are unable to find a job at the prevailing economic conditions. There are various forms of unemployment, among them cyclical, structural, frictional, and seasonal unemployment. Today, there are various reasons why the various types of unemployment occur. Cyclical unemployment often results when workers lose their jobs as a result of economic downturns in the aggregate demand of a country (Amadeo 2016). During recessions, businesses contract their operations and are forced to lay off some of their workers. Consequently, this causes unemployment. Correspondingly, structural unemployment arises due to the mismatch of skills and expertise in the economy. Often, the mismatch is caused by factors such as geographical immobilities, occupational immobilities, technological change, or structural changes in the economy. On the other hand, Frictional unemployment arises during the time which individuals move from one job to another (Krulick, n.d.). Although some of the unemployment types can be reduced through government efforts, some unemployment are unavoidable due to the existence of cost of hiring people Costs to hiring outside the voluntary relationship between workers and employers result in unemployment and are thus unavoidable. Factors such as minimum wages, corporate taxes, licensure laws and regulatory reforms increase the cost of hiring (Prince 2010). Predominantly, if it costs the company more to hire an individual than the job is worth, then the job fails to exist. Subsequently, this creates barriers to job creation, making certain forms of unemployment unavoidable. As a whole, the statement purporting that a rise in the price level within an economy leads to inflation is agreeable. Primarily, inflation is described as the persistent rise in the general price level in a particular economy (Harvey 2011). It is noteworthy that the continuous upsurge in the prices within an economy amounts to a significant fall in the purchasing power of money in that economy. The condition results from an array of internal and external factors within and outside the economy. Various schools of thought subscribe to the belief that inflation results from either a substantial increase in money supply or a reduction in the supply of goods within a given economy. Significant increases in the supply of money that are not accompanied by a proportionate increase in the supply of good and services creates excessive demand for output. The excessive aggregate demand creates pressure, thereby causing the prices for goods and services to rise. In turn, this leads to a demand-pull inflation. In addition, inflation may arise when the prices of key factor input increase. Due to rise in input prices, producers may be forced to transfer the costs to consumers in terms of higher prices for their products or reduce the supply of their output. When the supply of goods declines due to cost pressure, shortages may arise leading to an increase in prices (McMahon 2008). Consequently, this leads to cost push inflation. Therefore, the intensification of prices in an economy leads to an upswing in inflation. The aggregate demand curve is a graphical depiction of the quantity of services and goods demanded by the economy at various price levels (Arthur Sheffrin 2003). Typically, the vertical axis is plotted with the prices while the horizontal axis is plotted with the real output for that year. The AD curve is downward sloping. There are various explanations that explain this occurrence. The first reason pertains to the Pigous wealth effect. As such, the nominal value is constant whereas the real value of money depends on the prices. Thus, for any given level of money supply, a lower price means a higher purchasing power. Therefore, when the price level declines, individuals are wealthier and transact more (Arthur Sheffrin 2003). Hence, a decrease in prices of product encourages private expenditures, hence enhancing the AD. The Keynes interest rate effect can also explain the slope of the AD curve (Friedrich 1989). As prices increase, individuals need more money for their transactions, yet the supply of money is constant (Friedrich 1989). Thus, excess demand for money causes interest rates to increase. As interest rates rise, spending declines, and GDP also reduces. The net exports effect can also explain the negative slope. As price level rises, demand for imports increases while demand for exports drops. Subsequently, the net exports level drops. Given that net exports is a component of GDP, a decline in net exports leads to a decline in real GDP (Friedrich 1989). The long-run aggregate supply curve is a graphical illustration of the connection between output and price level in the long run. It covers the supply side of the total market. Characteristically, the LRAS is vertical and reflects the autonomous relationship between prices and aggregate real production (Pettinger 2011). By and large, the LRAS curve is vertical because it is assumed that the economy is operating optimally and only factors such as capital, labor and technology can affect the supply curve. By itself, the LAS is only affected by those factors that affect the overall potential output (Pettinger 2011). Thus, the LRAS is static because it shifts slowest at this point and changed in aggregate demand only cause a temporary change in the countrys total output. For this reason, there is only one potential output quantity that is supplied in the economy regardless of the prevailing prices. In contrast, the short-run aggregate supply curve is has a positive slope. Mainly, this is attributed to the fact that firms increase the price level as demand for their services and product increases (Pettinger 2011). When the price level increases, firms also increase the quantity supplied of the product. Thus, in the short run, there is a positive connection between the prices and the amount of good and services supplied in a particular economy (Pettinger 2011). In turn, the positive relationship between the prices and the level of output explains why the aggregate supply curve slopes upwards. Reference List Amadeo, K. (2016). 7 Main Causes of Unemployment [Online] The Balance. Available at: https://www.thebalance.com/causes-of-unemployment-7-main-reasons-3305596 [Accessed 1 Jan. 2017]. Arthur, OS, and Sheffrin, SM, 2003, Economics: Principles in Action, Pearson Prentice Hall, New Jersey. Buck, J. (2008). Limitations of Using GDP as a Measure of Quality of Life [Online] Economic Perspective. Available at: https://econperspectives.blogspot.co.ke/2008/08/limitations-of-using-gdp-as-measure-of.html [Accessed 1 Jan. 2017]. Friedrich, H, 1989, The Collected Works of F.A Hayek, University of Chicago Press. Harvey, J. (2011). What Actually Causes Inflation (and who gains from it) [Online] Forbes. Available at: https://www.forbes.com/sites/johntharvey/2011/05/30/what-actually-causes-inflation/#64678b2a4ad2 [Accessed 1 Jan. 2017]. Kruglick, A. (2010). What causes unemployment? [Online] Debt.org. Available at: https://www.debt.org/jobs/unemployment/united-states/ [Accessed 1 Jan. 2017]. McMahon, T. (2008). What Causes Inflation? [Online] Inflation Data. Available at: https://inflationdata.com/articles/2008/07/16/inflation-cause-and-effect/ [Accessed 1 Jan. 2017]. Pettinger, T. (2008). Difficulties in Measuring Living Standards [Online] Economics Help. Available at: https://www.economicshelp.org/blog/251/development/difficulties-in-measuring-living-standards/ [Accessed 1 Jan. 2017]. Pettinger, T. (2011). Difference between SRAS and LRAS [Online] Economics Help. Available at: https://www.economicshelp.org/blog/2860/uncategorized/difference-between-sras-and-lras/ [Accessed 1 Jan. 2017]. Prince, K. (2010). What causes unemployment? [Online] Renew America. Available at: https://www.renewamerica.com/columns/price/101013 [Accessed 1 Jan. 2017]. Williams, R. (2008). Why the GDP Is Not A Good Measure of A Nation's Well-Being [Online] Psychology Today. Available at: https://www.psychologytoday.com/blog/wired-success/201309/why-the-gdp-is-not-good-measure-nations-well-being [Accessed 1 Jan. 2017].