Quantitative Analysis Gross Domestic Product

Question: Discuss about the Quantitative Analysis Gross Domestic Product. Answer: Introduction: The gross domestic product (GDP) is the macro economic indicator that indicates the collective value of goods and services produced/render by a country in a fiscal year. It is also known as the national output. On adjusting the figures of gross domestic product for inflation, real GDP is arrived at. Thus, the real GDP is nothing but just the GDP adjusted on account of inflation (McTaggart, Findlay, and Parkin, 2012). The growth in real GDP reflects the overall prosperity of the country and not of the individuals. Further, the gross domestic product can not be used in measuring certain items which are crucial in evaluating standard of living such as health and life expectancy. Additionally, it does not take into account inequalities in the income distribution (McTaggart, Findlay, and Parkin, 2012). GDP an Unreliable Measure of Standard of Living: Further, the measurement of living standard of the people can not be based on any single factor. The gross domestic product could be one factor to evaluate the living standard of the people; however, it can not be the sole factor. Apart from gross domestic product, there are other factors such as unemployment rate, inequality of income distribution, poverty rate, life expectancy, and health which also are crucial in evaluating the living standard of the people (Avramov, 2002). Thus, concluding about the living standard of the people based on only GDP would be unreliable. Using GDP in conjunction with other factors to measure living standard of the people could present reliable results (Avramov, 2002). The unemployment is defined as the situation of an economy in which job seekers are greater than the available job opportunities. This implies that when the demand for labor is outpaced by the supply, the situation of unemployment is developed. In Australia, the prevailing aggregate unemployment rate has been found to be 5.70% (Australian Bureau of Statistics, 2016). Factor Causing Unemployment to Rise: There can not be any one factor attributable for rising unemployment in the country rather it is the combined impact of various factors taken together. The most crucial among those factors are age distribution, scale of structural changes, real wages rates, and unemployment benefits. It is quite common to observe that countries having young people as the large proportion of the population faces challenges to increase employment opportunities (Avramov, 2002). In this case, if the increase in employment opportunities is outpaced by the increase in the young age population, the problems of unemployment are sure to arrive. Further, the change in technology at large scale fills up the demand of worker by bringing modern machines into processes. The live examples of unemployment caused due to the technological developments at the large scale are the countries such as India and China. It has been observed that low wages rates cause the unemployment rate to go high (Avramov, 2002). Unavoidable Unemployment: In certain situations, the unemployment becomes unavoidable. For instance, cyclical unemployment is caused due to cyclical changes in the economy which are unavoidable (Avramov, 2002). Every economy in the world has to go through the cycles of recession and depression once in the life time. As the economy is grabbed by the recessionary conditions, the problems of unemployment are doomed to arrive. Price level in respect of goods and services is the average of current prices of goods produced or services rendered, taking the country as a whole. The rate of inflation shows increase or downfall in the average prices of the goods or services in the current period as compared to the previous period. Relationship between the Level of Prices and Inflation: Inflation is measured with reference to the prices of goods and services. The rise in prices of goods and services indicates rising inflation (Hubbard et al., 2014). The computation of inflation is made based on the average prices of goods and services, therefore, it could be said that rise in average prices of goods and services indicates rise in the rate of inflation. As the inflation increases, the value of currency goes down. The decrease in the value of currency implies that fewer goods could be bought now with the same amount of money. There several reasons which cause the inflation to arise. The economics agree among themselves that all factors that cause sudden increase in demand or increase in the cost of production contribute to inflation. It could be decrease in interest rate that may cause inflation to rise. This is because, the low interest rates makes the borrowing cheaper, which pushes the demand of goods and services upside in the market (Hubbard et al., 2014). The de mand goes up, which causes the producers and sellers to raise the prices up and the increased prices of goods and services ultimately culminates in high inflation. The simple demand curve depicts relationship between the demand of goods and the prices of such goods. On the vertical axis, the prices of goods are presented and horizontal axis is tagged with the quantity demanded. In case of aggregate demand curve, the important thing to note is that the quantity demanded does not relate to any specific item rather it is aggregate quantity of all the goods produced in a country (Arnold, 2007). In the same way, the price of goods and services is also reflected by GDP of the country. The aggregate demand (AD) curve slopping downward is shown below: The inverse relationship between the price and demand causes the demand curve to slope downward; however, it is important to understand as to which factors cause changes in price level of the goods and services. The aggregate demand curve slops downward which is considered due to three major reasons such as wealth effect, interest rate effect, and net exports effect (Arnold, 2007). The wealth effect relates to supply of money. When the price level rises up, the government shrinks the supply of money due which buying power of the buyer goes down. The decrease in the buying power of the buyer brings the demand down. Another factor is the interest effect. The government increases interest rates to control spending. The controlled spending causes reduction in the demand of the goods and services. Further, the position as regards net exports is also crucial to know as to why the aggregate demand curve slopes downward (Arnold, 2007). The aggregate supply curve reflects the quantity that all the firms and producers within a country are willing to sell at a give price level. The quantity is plotted on the vertical axis of the curve while the price levels are shown on the horizontal axis. The long term aggregate supply curve is drawn assuming that all the factors of production change and no factor remains constant or fixed (Mankiw, 2014). A chart depicting long run aggregate supply curve is shown below: Further, assumed that there are only three factors such as capital, labor, and technology having bearing on the aggregate supply in the long run. This means that the aggregate supply in the long run is affected by only these three factors. Other micro factors including price do not affect the demand. This assumption is also one of reasons which cause the aggregate supply curve to go vertical. The change in labor at a large scale or change in the technology would cause the production to go up or down, which will cause the aggregate supply curve to shift. However, the changes in these factors at a large scale are seen rarely. This is the reason why the aggregate supply curve remains vertical in long run (Mankiw, 2014). This is due to the reason that increase in the prices in short run is not accompanied by the increase in cost in parallel. Therefore, the producers find it profitable to increase supply on increasing the prices of goods in the short run causing the aggregate supply curve to slope upward (Mankiw, 2014). References Arnold, R.A. 2007. Economics. Cengage Learning. Avramov, D. 2002. People, Demography and Social Exclusion. Council of Europe Hubbard, R.G., Garnett, A.M., Lewis, P., and O'Brien, A.P. 2014. Macroeconomics. Pearson Australia. Mankiw, N.G. 2014. Principles of Macroeconomics. Cengage Learning. McTaggart, D., Findlay, C., and Parkin, M. 2012. Macroeconomics. Pearson Higher Education AU. McTaggart, D., Findlay, C., and Parkin, M. 2012. Macroeconomics. Pearson Higher Education AU. Australian Bureau of Statistics. 2016. Labor force Australia November 2016. [Online]. Available at: https://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0 [Accessed on: 03 January 2016].