PACC6007 Economics
Question One
a) Calculating the equilibrium level of real GDP in this economy
Equilibrium GDP (Y) = C + I + G + X – M
Y = C + I + G + X – M
Here,
C = consumption expenditure,
I = investment expenditure
G = government expenditure
X = exports
M = imports
Net Export (NX) = X-M
Y= (300 + 0.8Y) + 200 + (200 -100)
Y= 600+0.8Y
Y-0.8Y =600
0.2Y = 600
Y = 600/0.2
Y= $3000 billions
b) Impact of GDP on Everyone in the Economy
It is identified that the GDP ofKraftwerk’sis growing on a significant level over the last few years however some of the citizens are showing the protest that their quality of life is not improving. Three possible reasons which are found regarding the growing GDP does not necessarily mean everyone in that economy is better off are as follow:
- GDP calculates the economy growth as a whole rather than giving concern towards each and every industry.
- It calculates the per capita income growth rather than calculating the growth of individual sectors.
- GDP does not adequately measure the true health of the nation. It is just calculate the economy superficially rather than going to the deeper aspects. Due to which there is a need of replacing it by more comprehensive measurement criteria (Malhotra, 2014).
a) Calculating the equilibrium level of real GDP in this economy
Consumption (C) = 300 + 0.8Y
Investment (I) =200
Government expenditure (G) = 200
Net exports (NX) = -100
Equilibrium level(E) = ?
(Assuming the amounts are billions of dollars.)
E = C+I+G+NX
E = 300 + 0.8Y + 200 +200 + (-100)
E = 600 + 0.8 Y
b) Impact of multiplier effect on GDP
Fruehwirth (2014) identified that new demandplays the role of injection in the circular flow and shows multiplier effect. The reason behind it is identified that due to extra income, spending also increases which creates more income, and this cycle remains continuing. The multiplier effect reflects the increase in final income which arisesdue to catalyst of spending.
Multiplier size depends on household’s marginal decisions ofexpenditure which is also known as marginal propensity to consume (mpc). Moreover, when the income spent, it becomes someone else’s income.
In this context, marginal propensities reflects the proportion of extra income which allocate the particular activities, likesaving by households, investment spending by the firms, expenditure on imports, etc. For instance, if the total new income in a given time span in a particular country products is 80% then the marginal propensity to consume can be calculated through 80/100, i.e. 0.8(Jordà, & Taylor, 2016).
c) Calculating the Full Employment Output
The economy is below full employment output:
=$3500-$3000
= $500
d) Closing the Gap between Actual and Potential Real GDP
The government should increase spending by $500 billions to close the gap between actual and potential real GDP.
e) Injection of Government Expenditure and Increase in GDP
Gemmell, Kneller, &Sanz (2015) identified that government expenditure also increases the GDP as government spending enables towards increase in aggregate demand. If the government expenditure of £1 billion increases the aggregate demand by £1 billion, then the value will 1.0.
However, if the expenditure of £1 billion injects the real GDP to increase by £2 billion, then the multiplier value will become 2.0. It reflects that this initial injection supports to maximise the multiplier value more than the G expenditure.
Government policies such as first home buyer’s grants and tax concession for investors in the context of tax deductions over the property expenses, etc. actuallysupports to make the housing less affordable for average wage earners. It will support towards increasing the demand of the housing market(Borucke, et al., 2013).
However due to increase demand, the price of the housing will increase as the supply will remain still due to which the cost of housing will also increase and it will not remain affordable. To make housing facility more affordable government should focus towards offering the subsidiary facility according to the need of the citizens which will support to help the needy and will also enable towards controlling the demand.
b) Zero Percent Unemployment Rate
According to the views of Ball (2013), 0% unemployment rate would be excellent for the citizens of the country however, it is identified that it is essential to having a small amount of unemployment due to cyclical unemployment, frictional unemployment and structural unemployment.
Moreover, positive rate of unemployment supports towards the development of technology, as in this situation, people show their efforts to chase their dreams. So, it can be said that zero percentunemployment rate is not a positive thing.
If a person was cyclically unemployed for a while, then it might become structural unemployment. The reason behind it is that when due to cyclical unemployment employees remain unemployed for long-term period then it becomes structural unemployment and in this situation, employees need to acquire new skills to becomemore competitive.
Additionally, when the economy begins to expand the companies start hiring them again. Diamond (2013) stated that cyclical unemployment takes place due to downturn in the business cycle due to whichfirms lay off the workers to reduce the company cost. Over time, when the economy improves, organization needs skilled employees to perform the certain tasks and for that purpose organization needs employees with new skills.
Since 1970, developing countries have experienced significant population growth. Due to this population growth developing countries have to face the issues of inadequate resources. Coale,& Hoover (2015) stated that there is a fixed quantity of land and resources and population growth eventually reduce the amount of resources which can be consumed by each individual due to which increase in in disease, starvation and war takes place.
Population growth constitutes a potential threat towards the economyof developing country and creates risk towards the country growth.However, population growth supports the country to increase the number of manpower which supports towards increasing the country growth as no economy can grow without the human resource.
In the views of Barclay (2015), increasing in youth population supports towards country growth but increasing in the old population increases the burden oven economy.
b) UK Macroeconomic Conditions
UK macroeconomic conditionsare as follow:
UK economic growth is showing better result than expected in the last six months. Due to Brexit vote, it was expected that economy will show adverse situation however, from the early 2017 its economy has began to ease. Country inflation rate is rising andclutchingthe household spending power.
The unemployment rate of UK is approx. 4.6% in the year 2017. Its inflation rate has reached to 8.50% in the 2017 which is all time high.The UK is showing current account deficit which is by GBP 12.1 billion by the last three monthsof the year 2016and it has again down by GBP 13.6 billion from a GBP 25.7 billion in the previous period (Trading Economics, 2017).
From this, it can be identified that the country economy is improving and exports is exceeding the country imports.
The macroeconomic challenges, that is faced by UK over the next decade is as follow:
- There is a challenge can be seen over the exporters as it is identified that uncertainty of the economy due to BREXIT will decrease the earnings through export and towards future foreign investments
- There is a risk can be seen over exchange rate risk
Policies or actions governments taken to address these challenges:
To handle these challenges, government is working towards decreasing the strictness regarding the policies of foreign trade. Moreover, country is focused towards offering the loans to the firms at lower interest rate to boost up the trade (Tetlow, & Giles, 2017).
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Coale, A. J., & Hoover, E. M. (2015).Population growth and economic development.Princeton University Press.
Diamond, P. (2013).Cyclical unemployment, structural unemployment.IMF Economic Review, 61(3), 410-455.
Fruehwirth, J. C. (2014). Can achievement peer effect estimates inform policy? A view from inside the black box.Review of Economics and Statistics, 96(3), 514-523.
Gemmell, N., Kneller, R., &Sanz, I. (2015). Does the Composition of Government Expenditure Matter for Long‐Run GDP Levels?.Oxford Bulletin of Economics and Statistics.
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