ECO202 Case 1

Joshua Hatfield
ECO202
21 January 2015

Case 1 Gross Domestic Product or also known as GDP is the total market value of all the final goods and services produced within the economy in a given year. Real GDP measure the total output and does not increase just because the price increases. Real GDP uses the same prices for both years. From the information that was provided in the question we can then find what the growth in real GDP will be. The value of the real GDP’s produced in 2013 were 10 shirts at $20 dollars each and 5 hamburgers at $5 dollars each. Since the price of the shirts were $20 dollars each and the hamburgers were $5 dollars each in 2013, we will simply use the same price for the products that were sold in 2014. The totals that were sold in 2014 were 15 shirts and 10 hamburgers. So the value of the real GDP’s produced in 2014 using 2013 as the base year is $350 dollars. The growth in the real GDP would be the total amount of the real GDP in 2014 which was $350 dollars divided by the real GDP of 2013 which was $225 dollars. So the growth would be 350/5 or 1.6 percent. Unemployment are people who do not currently have a job but are actively looking for a job. The unemployment rate is the percentage of people in the labor force who are unemployed. There are three basic types of unemployment. The first is a cyclical which is the result of fluctuations in real GDP. Unemployment rises when the real GDP falls, and falls when the economy improves. The second is Frictional unemployment which occurs naturally in the economy. It refers to the time it takes to find an appropriate job. And the third is Structural unemployment which refers to the mismatch between job openings and the skill of workers seeking jobs. Even when the economy is at full employment the unemployment rate is not at zero because of the natural rate of unemployment. The natural rate consists of frictional and structural unemployment. It exists because although those individuals may have jobs, they are not working where their knowledge and skills are best suited. When this happens there is no cyclical unemployment. In the United States, the natural rate of unemployment is between 4.0 and 5.5 percent. There are many cost in the loss of income and resulting financial difficulties. Unemployment insurance is not available to all and is only for a limited period of time and it replaces only a fraction of your earnings. When unemployment rates are high, fewer jobs will be available. If a person is unemployed, their skills and work habits depreciate. This in the long run will make it harder for them to find employment. There are also many hardships that come with unemployment. One that is known too well is psychological strains. The Consumer price index also known as CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. In the chart that was given it states that in the year 2010 the CPI also known as the Consumer Price Index was 106.0 and in the year 2011 the CPI was 111.0. Inflation is the percentage rate of change of the price level in the economy. (Pearson 2013). Inflation can be a sore to the economy, it causes the economic system to slow down and messes with the efficiency. The inflation in 2010 was 106.0 and the inflation in 2011 was 111.0. To find the inflation rate you would take the year 2011 and subtract it by the year 2010. So the answer would be 5. Then you would take 5 and divide it by the year of 2010. So you would take 5 and divide it by 106.0. The inflation rate from 2010 to 2011 would be 5% percent. If we were supposing that the income in the year 2008 was $30,000 dollars and we needed to find out how much we would need to be able to have the same standard of living in 2009 how would one come up with this answer. According to Dolan “When we say the cost of living increases, we mean that it gets harder to maintain a given standard of living on a given income”. The thing that we have to do is save less, or work harder. (Dolan 2014). Since in 2008 the CPI was 100.0 and in 2009 the CPI was 102.5, you would take the total amount of income of $30,000 dollars and multiply that by 102.5 then divide that by the 100.0. The total that you would need in 2009 to have the same standard of living would be $30,750 dollars. Some of the problems with CPI is that it does not take into account that there may be a reduction in purchases or items that prices have risen dramatically. An example of this are produce prices during a drought. They assume that even though the price increased, the same amount of those goods are being purchased. Some economist believe that the inflation rate is overstated by between 0.5 percent and 1.5 percent each year. This means they believe that cost of living adjustments tend to be larger than they should be. There are many limitations of using GPD as an indicator of standard of living. One of the main limitations according to tutor2u.net is “National GDP figures hide significant regional variations in outputs, employment and incomes per head of populations”. The GDP figures do not show how the income is distributed nor do they show the uneven spread of financial wealth. They also tell us very little about the quality of the goods and services produced. Another issue is GDP only measures activities that are sold in legal market. An example of this would be hiring a plumber to fix a water leak at your house. They do not consider the cost if you fix the plumbing yourself. And lastly, GDP does not measure the quality of the environment. This means the air, water and other resources may become more polluted. These are some of the things I believe are limitations of using the GDP as an indicator of standards of living.

References http://www.economonitor.com/dolanecon/2014/07/23/what-does-the-consumer-price-index-measure-inflation-or-cost-of-living-whats-the-difference/ http://www.pearsoncustom.com/mct-comprehensive/asset.php?isbn=1269879944&id=12299