Answer to Question #181943 in Economics for Million Kifle

Question

UN_6 Review questions 

1. What is the difference between GDP and GNP? Which one is a better measure of the 

economic performance of a country?

2. What is unemployment? How can we measure it?

3. What is inflation? What are its causes? What is its impact on the economy?

4. Discuss the three major differences between CPI and GDP deflator.

5. Consider the following information for a particular economy.

Total population = 60 million Number of employed = 30 million

Total labor force = 40 million Natural rate of unemployment = 12%

a) Find the total unemployment rate 

b) Calculate the cyclical unemployment rate 

Answer 1

1. GDP measures the value of goods and services produced within a country's borders, by citizens and non-citizens alike. GNP measures the value of goods and services produced by only a country's citizens but both domestically and abroad. GDP is the most commonly used by global economies, but GNP is a better measure of the economic performance of a country.

2. The official unemployment rate for the nation is the number of unemployed as a percentage of the labor force (the sum of the employed and unemployed).

3. Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.

Inflation can impact the cost of living, the cost of doing business, borrowing money, mortgages, corporate, and government bond yields, and every other facet of the economy.

4. The first is that GDP Deflator includes only domestic goods and not anything that is imported. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.

The third difference is that CPI or RPI assigns fixed weights to the prices of different goods, whereas the GDP deflator assigns changing weights.

5. a) The total unemployment rate is:

(30 - 40)/40×100% = 25%.

b) The cyclical unemployment rate is:

25 - 12 = 13%.