Principles of Economics Structural

Question: 1. Explain why real GDP might not be an unreliable indicator of the standards of living. 2. Why does unemployment arise and what makes some unemployment unavoidable? 3. Consider the following statement: When the average level of prices of goods and services rise, inflation rises' Do you agree or disagree? Explain. 4.What is the aggregate demand (AD) curve and why does it slope downwards? Explain. 5. What is the long-run aggregate supply (LRAS) curve and why is it vertical? Why does the short-run aggregate supply curve slope upwards? Answer: 1. Utilizing GDP to quantify the prosperity of people in a given economy presents different impediments which make the system questionable with regards to the measuring of the ways of life. One reason why real GDP can't be utilized to gauge the nation's well-being is the way that it doesn't consider the leisure time. Relaxation time is a vital item which contributes a ton to the economic prosperity and performance of a person. Accordingly, keeping different variables consistent, the more leisure time we have, the happier we are. Another reason why the strategy is unreliable in measuring standards of living is that gross domestic product does not figure fundamental components, for example, air, and water contamination. (Coyle, 2014, p.76-119). Two economies of two different countries may have similar GDP, yet one contains contaminated water and air while the other economy doesn't have any contamination. The way of life between these economies will be distinctive, yet this won't be indicated in the real GDP. Real gross domestic product concentrates on products which pass through the markets and ignores those goods which are usually produced for subsistence purposes only. Subsistence farming is among the main economic activities which take place in under-developed and developed countries. Failure to include subsistence farming in the country's GDP implies that the well-being of that particular nation is low. 2. Seasonal unemployment is a type of unemployment which arises as a result of the changes in demand which occurs regularly in a given periods of the year. (Janoski, Luke, Oliver, 2014, p. 105-123). Examples of industries where this type of unemployment is experienced include tourism and farming. Structural unemployment happens because of the long-term reduction in the demand in a particular industry prompting to less opportunity as demand for labor reduces. The latest supplanting of robots with human labor in different assembling enterprises, for example, the car industry is a case of structural unemployment. Aside from the replacement of robots with human work, structural unemployment may likewise be accordingly of global rivalry brought by globalization and changes in relative comparative advantage. Cyclical unemployment is brought on by the absence of demand for the available products. It emerges when the economy of a given nation is below the required capacity. A good example is a point at which an economy encounters the recess period whereby the total demand will reduce leading to a reduction in the level of yield and negative economic development. Due to lack of demand for goods and services, companies usually produce a limited quantity of output. Less output means that the organization will earn less income and may prompt the company to lay off some of the employees to reduce various fixed expenses. Continuous transformation of various industries from labor to capital intensive and changes in economic phases such as boom and recession make unemployment to be unavoidable. 3. I agree with the statements that rise in the average cost of products and services prompts to increment in inflation. Inflation is defined as the rise in prices of commodities and services which leads to decrease in the purchasing power of the currency. From the definition, we can safely say that there is a positive correlation between inflation and the prices of goods and services. When the rate of inflation is high, the commodity prices also become high. Too much money in the economy means that a lot of cash is in the hands of the people. Having a lot of money means that individuals will either choose to spend the money or save. But due to low-interest income which individuals will get as a result of saving, many people will decide to spend the extra amount of money also known as discretionary income. Discretionary or disposable income is defined as the remnant of the individuals' basic salary after other deductions such as PAYE have been subtracted. (Rogers, Jalal, Boyd, 2008, p. 300). Since many consumers will choose to spend the disposable income, there will be an increase in demand for goods and services. The increase in demand will force the sellers and suppliers to increase in prices of the commodities and services as a measure to counter the inflating demand. The average prices of goods and services will increase or reduce based on the increase or decrease in the rate of inflation respectively. Therefore, we can conclude that, when the overall prices of commodities increases, inflation also increases. 4. The aggregate demand curve is defined as the sum of overall demand for final products and services in a given economy at a particular period. When the curve slopes downward, it implies that as the prices of the goods and services decrease, the level of output on the other hand increases. It also means that when the level of prices reduces, the level of national income increases. There are three main reasons why the curve slopes downwards. The reasons are Mundell-Fleming's exchange rate effect, Pigou's Wealth effect, and Keynes's interest rate effect. According to Mundell-Fleming's exchange rate effect, when the prices of products reduce, the interest rates also reduce. Reduction in interest rates may force the investors to withdraw their domestic investment and concentrate in foreign investment since domestic investment provides low-interest income. (Sparknotes, 2016, par. 4). Apart from an increase in foreign investment, there will be depreciation in the exchange rate and increas e in the net exports which will translate to increase in aggregate demand. The second reason is Pigou's Wealth effect. The nominal value of the currency is fixed, but the real value of money depends on the level of prices. Reduction in the level of prices leads to increase in the level of consumer consumption. High level of consumption leads to increase in aggregate demand. The third reason is Keynes's interest rate effect which postulates that reduction in the price level leads to a reduction in the level of interest rates and increase in investment which in turn increases the aggregate demand. 5. The long-run aggregate supply curve is defined as a graphical representation of the long-run relationship between the price and the output. It is a period which is efficient for companies to arrange various factors of production to meet the expected economic profits or losses. The LRAS curve is vertical since, in the long run, the quantity of goods and services generated relies on the technology, natural resources, labor, and capital present in an economy and not the price. Salaries and prices are highly flexible, and this means that when there's a change in the level of prices as a result of inflation, wages and other factors of production respond accordingly. For example, if the prices of commodities are doubled or reduced by half and the wages adjusted consequently, there will be no change and the economy will remain at full-employment. Short-run aggregate supply curve slopes upward because the supply curve is drawn based on a fixed nominal variable such as wage rate. In the short-run period, wages are fixed, and therefore, any rise in the prices leads to high profits due to increasing in output level. (Gans, 2011, p. 858). References Coyle, D. 2014. GDP: A brief but affectionate history. Princeton, New Jersey: Princeton University Pres. https://search.ebscohost.com/login.aspx?direct=truescope=sitedb=nlebkdb=nlabkAN=1063822 Gans, J. (2011). Principles of economics. South Melbourne, Vic: Cengage Learning. Janoski, T., Luke, D., Oliver, C. (2014). The causes of structural unemployment: Four factors that keep people from the jobs they deserve. Cambridge, UK: Polity Press. https://search.ebscohost.com/login.aspx?direct=truescope=sitedb=nlebkdb=nlabkAN=808923. Rogers, P. P., Jalal, K. F., Boyd, J. A. 2008. An introduction to sustainable development. London: Earthscan. https://public.eblib.com/choice/publicfullrecord.aspx?p=429931. Sparknotes 2016. Agrregate Demand. [Online]. Available from: https://www.sparknotes.com/economics/macro/aggregatedemand/section2.rhtml. [Accessed 7 January 2017].