Business Economics - Question 1

a) Gross domestic product of a country can be defined as the market value of final goods and services that are produced within the domestic territory of that country within a given period of time.

In other words, it is a quantitative measure that tells the value of economic activity within an economy. Gross domestic product has become a very significant indicator of economic performance of a country.

There are many items which are excluded from the calculation of GDP:

  • Second-hand sales; for example: buying used car from your neighbour, buying guitar at thrift shop etc.
  • Overseas production; for example: Australia owned firm in US.
  • Non-market transactions; for example: food cooked by mother, fixing your own car.
  • Intermediate goods; for example: milk used in the production of cheese by the industry.
  • Financial transactions; for example: purchasing bonds and stocks.
  • Transfer payments; for example: charity or welfare payments.
  • Illegal transactions or black market activity; for example: production of illegal drug.
  • Unreported transactions; for example: tipping the pizza delivery boy.

b) According to the expenditure approach of calculating GDP, it is a sum of consumption spending by households, investment spending by the businesses, government expenditure on goods and services and total net exports. Net exports is the exports of goods abroad minus the imports of the foreign goods by the people in the economy.

GDP = C + I + G + (X-M)

Here, C = Consumption Spending

I = Investment Expenditure

G = Government Expenditure

X = Exports of the country

M = Imports of the country

c) Income approach of calculating GDP is based on the concept that all expenditures are equal to the total income of an economy that is resulted by the production of goods and services.

In other words, it aggregates the factor incomes of an economy. Compensation of employees, wages, salaries, corporate profit interests, income from non-farm businesses and other miscellaneous investment income are added to arrive at national domestic product at factor prices (Krajnev & Stepnova, 2014).

National Domestic Product at factor prices= Compensation of employees + Operating Surplus + Mixed Income

Operating surplus comprises of profits, interests and rents and mixed income is the income of self-employed. Two non-income adjustments are put together to arrive at gross domestic product. First, indirect taxes are added and subsidies are subtracted to calculate the value at market prices rather than factor prices. Second, depreciation is added to transform from national domestic product to gross domestic product.

Gross Domestic Product at market prices= National Domestic Product at factor prices + Depreciation + (Indirect taxes – Subsidies)

d) Value added approach of calculating GDP is also known as output or net product method. There are three stages in value added method:

  • Gross value of output is estimated:

Gross value of output = Worth of total sale of goods and services + Worth of changes in the inventories

  • Determination of the value of intermediate consumption. This includes the cost of material used to produce the final goods and services.
  • Calculation of net value of domestic product:

Net value added = Gross value of output – Value of intermediate consumption

The net value added of all the sectors of economy, that is, primary, secondary and tertiary gives the value of gross domestic product at factor prices. By adding indirect taxes and subtracting subsidies, gross domestic product at market price is determined.

e) The problem of double counting arises when the value of intermediate goods are also added in the calculation of GDP. For example, while taking the value if final good like bicycle, the value of tyres, tubes are also added. This leads to the problem if double counting . To avoid this problem, value added method is used to calculate GDP. This method sums the net value added of all the sectors and avoids the problem of double counting.

Business Economics - Question 2

The above figure shows the changes in the price and output due to reduction in the government spending. The downward sloping curve is aggregate demand curve AD1. The upward sloping curve is short run aggregate supply curve SRAS and the vertical line is the long run aggregate supply curve LRAS showing full employment level of output. Before the reduction in government spending, the equilibrium is determined by the intersection of AD1 curve and SRAS curve at full employment level of output. The point of equilibrium is E1 and the price is P1. When the government reduces its spending, the aggregate demand curve shifts to left from AD1 to AD2. The output falls below the full employment level to Q2 and the price also decreases from P1 to P2.

Business Economics - Question 3

The monetary policy is used by the central bank to control the money supply in economy and achieve the target policy goal. When the central bank increases the cash rate in the economy, it makes credit costlier and thus the money supply in the economy falls. In the figure, it is shown by a leftward shift of money supply curve (Aikman et al., 2020). This results in increase in the interest rate. Increase in the interest rate increases the cost of borrowing which further results in fall in the level of investment spending. The quantity of investment falls from Q1 to Q2. This impacts the aggregate demand curve and the curve shifts to left. The output and price in the economy falls. Thus, through the process of monetary policy transmission the central bank is able to achieve its goal.

Business Economics - Question 4

a)

GDP per capita(current)

2005

2010

2015

2018

Australia

33,999.2

52,022.1

56,755.7

57,395.9

China

1,753.4

4,550.5

8,033.4

9,770.8

India

714.9

1,357.6

1,605.6

2,010.0

US

44,114.7

48,467.5

56,822.5

62,886.8

GDP growth rate(%)

 

 

 

 

Australia

3.2

2.1

2.2

2.9

China

11.4

10.6

6.9

6.6

India

7.9

8.5

8

6.8

US

3.5

2.6

2.9

2.9

Inflation rate(%)

 

 

 

 

Australia

2.3

2.9

1.5

1.9

China

1.8

3.2

1.4

2.1

India

4.2

12

5.9

4.9

US

3.4

1.6

0.1

2.4

c) The GDP growth rate fell of almost all the economies during the financial crisis in the year 2008. Therefore, the growth rate fell for Australia, China and US in 2010. However, India’s growth rate increased from 7.9% in year 2005 to 8.5% in year 2010. After 2010, the growth rate of China and India fell from their 2010 levels. Whereas, Australia’s growth rate is increasing since 2010. United States’ growth rate was stagnant to 2.9% in the year 2015 and 2018 (Tavani & Zamparelli, 2017).

The inflation rate of Australia, China and India had increased in the year 2010 as compared to 2005. However, US inflation rate had decreased in the year 2010. In the year 2015, all the four countries noticed a fall in their inflation rates. In the year 2018, Australia, China and US experienced an increase in the inflation rate as compared to 2015. However, India’s inflation rate fell by 1%in the year 2018 as compared to 2015.

References for Business Economics

Aikman, D., Lehnert, A., Liang, N., & Modugno, M. (2020). Credit, financial conditions, and monetary policy transmission. International Journal of Central Banking, 16(3), 141-179.

Krajnev, Z. I., & Stepnova, O. V. (2014). Methods of calculating GDP. In Society, science and innovation. Collected papers of the International scientific and practical conference. Ufa, Republic of Bashkortostan (p. 54).

Tavani, D., & Zamparelli, L. (2017). Government spending composition, aggregate demand, growth, and distribution. Review of Keynesian Economics, 5(2), 239-258.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Business Economics Assignment Help

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