Answer to Question #158772 in Macroeconomics for sajawal

Question

In each of the following cases, does the increase in prices affect CPI, GDP deflator, or both in Pakistan? Analyze and justify your answer.                      (2 Marks)

The price of imported capital goods used in the production of sugar has increased.

The price of Tapal tea has increased.

Analyze and explain the effect of the minimum wage law on the unemployment rate.

Explain your answer by using graph.

Answer 1

Solution:

1.). The increase in the price of imported capital goods will only affect CPI. This is because the goods imported are included in the CPI basket which is consumed by typical consumers within the country.

 

2.). The increase in Tapal tea price will affect both the CPI and GDP deflator. This is because it makes up a larger part of consumer budgets. The GDP deflator uses as a basket all final goods and services produced in the domestic economy, while the CPI basket also includes goods and services purchased by normal consumers. Therefore, changes in the price of domestically produced consumer goods affect the GDP deflator and CPI more.

 

3.). Raising the minimum wage has a negative impact on unemployment levels. Increasing the minimum wage can lead to increased unemployment, depending on the wage increase, as employers would seek automation as opposed to hiring workers.

This is depicted in the below graph: