Discussion problem #1
Both inflation rate and unemployment rate are closely watched aspects of macroeconomic performances of the economy, and they are also among the key variables guiding macroeconomic policy targets. Moreover, the sum of inflation rate and the unemployment rate is described as the misery index, which purports to measure the health of the economy and welfare.
The existence of high unemployment rate is a serious problem for households and for a nation at large. National outputs of goods and services decline during the recessionary gap of the business cycle and lead to high rate of unemployment. On the other hand, inflationary pressure leads to high inflation rate, which in turn leads to a decline in real income. Thus, high inflation rate has adverse effect on welfare of citizens, and the general economic well-being of a nation because it reduces effective demand and purchasing power of the people.
Studies indicate that there is a short-run tradeoff between inflation rate and unemployment rate. Thus, in the short-run, the tradeoff of between inflation rate and unemployment rate creates a challenge for macroeconomic policymakers.
1. If you were macroeconomic policymaker, how do you balance the short-run tradeoff between inflation rate and unemployment rate? Explain.
2. Official unemployment rate is an imperfect measure of joblessness. Give examples on how the definition of unemployment rate overstates or understates the number of jobless people in the economy.
3. Some policymakers and analysts argue that unemployment benefits create disincentives for job search and prolong the unemployment of workers. What’s your opinion on the relationship between unemployment benefits and labor market participation of the unemployed people?
2) Go to http://www.weforum.org. Click on the “Reports” tab and find the latest report entitled “Global Competitiveness Report” that is available.
Spend some time going through the materials there and become familiar with the criteria used for the rankings. Next, pretend that you have been put in charge of improving the ranking of a country in the bottom half of the list and outline a plan for moving up in the rankings. You can use a specific country or speak in general terms that apply to any nation seeking to become more competitive. Construct thoughtful and detailed responses.
Gross Domestic Product (GDP) measures the market value of all final goods and services produced within a country in a given period of time. In other words, GDP measures continuous flow of money from households to firms and then back to households in the whole economy. (Refer to Chapter 25)
The trend of the GDP growth rates is the key indicator of macroeconomic fluctuations (business cycle), which include expansion, boom, contraction, and recession. Thus the real GDP is used to explain how well the overall economy of a country is performing whereas GDP per capita is used as a natural measure of the economic well-being of the average individual in a given country.
However, there are limitations (shortcomings) in using the GDP as a measure of national income as well as a measure of national welfare.
1. What are the limitations of the GDP in measuring total output and national welfare? What products (services) are excluded from the GDP computation?
2. Is the GDP measure underestimating or overestimating national production and total income in the economy? Why?
3. What are the impacts of the shortcomings of the GDP as a measure of the national product and national welfare?
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