GDP, economic growth, unemployment and inflation


1. What is the gross domestic product of a country? What is meant by ‘intermediate goods’ and are they included in the measure of GDP? Give an example of a good that could be an intermediate good or a final good depending on the situation. Explain your answers.
• The gross domestic product (GDP) is a key pointer used in the direction of measure the strength of a country’s economy. It characterizes the overall dollar worth of all possessions and facilities formed over a precise period, often specified to as the size of the economy. Generally, GDP (Gross domestic product) is stated as an evaluation to the previous quarter or year.
• For example, if the Q3 2018 GDP (Gross domestic product) of a country is up 3%, the economy of that country has grown by 3% over the third quarter. While quarterly growth rates are a periodic measure of how the economy is faring, annual GDP figures are often considered the benchmark for the size of the economy.
What is intermediate good?

• An intermediate good is a product used to produce a final good or finished product. These goods are sold between industries for resale or the production of other goods.
• Gross domestic product (GDP) is a measurement of the market value of final goods. If intermediate goods were included in the calculation, the intermediate goods would be counted twice in the GDP calculation giving an inaccurate value. Therefore, the value-added approach is used when calculating intermediate goods. This approach values every stage of production involved in producing a final good.
• For an example of an intermediate good is salt, a product that is directly consumed but also used to manufacture food products

Suppose that the following table represents the goods and services produced in a very simple closed economy in 2016. Using the information in the table below to answer question 2.

Product Quantity Price
Steel 1000 $100
iPods 5000 $300
Cars 500 $25 000
Legal Services 100 $2000

2. Assume that steel is used as an input in the production of cars. Using that information, calculate the GDP for the year 2016? Explain your answer in words and show all calculations. (2 marks) – Maximum number of words 120 plus calculations

For each of the following, indicate if the person would be classified as employed, unemployed, or not in the labour force and why:

3. a 45-year-old person who has been made redundant in their current position, is looking for work and is able to start immediately, but does not have the skills required by industry and needs retraining.

4. a person who is working for 10 hours a week paid work in a supermarket while studying full time. The person is looking for full time work but cannot start until they finish their study in 3 months time

To be classified as employed a person must have worked in paid employment only 1 hour or more in the week before the survey. In this scenario since this person is already working more than 1 hour that is for 10 hours and since he is not looking for another work he belongs to the employed category, though there is a question about whether the worker’ full capacity has been utilized (That is he can work for more hours ,therefore underemployed).

Refer to the following table and answer question 5.

Employed 8000
Unemployed 500
Not in the labour force 4000

5. Define and calculate the unemployment rate (show working). What is the labour force participation rate. (2 marks) – Maximum number of words 70 plus calculations

6. Suppose an economy has only three goods, and the typical family purchases the amounts given in the following table. If 2005 is the base year, then, what is the CPI for 2015? Show all working out and explain your answer. (2 marks) – Maximum number of words 40 + calculations

CPI= Expenditures in the current year *100
Expenditures in Base year

Product Quantity (2005) Price (2005)
($) Price (2015)
($) Expenditures
(Current year)
Qty (2005) * Price (2015) Expenditures (Base year)
Qty (2005) * Price (2005)
Computers 2 1700 1200 2400 3400
Books 50 25 30 1500 1250
Burgers 150 1 2 300 150
Total $4200 $4800

CPI = (4200/4800) *100=87.50

Task 7: Business Cycle and Aggregate Demand & Supply

1. Explain the three reasons the aggregate demand curve slopes downward. (2 marks) – Maximum number of words 100

Explain how each of the following events in questions 2, 3 would affect the aggregate demand curve.

2. Consumers become more pessimistic about the future economic growth as unemployment rises. No graph required.

3. Domestic prices increase, which decreases exports. No graph required

Read the following excerpt and answer the question 4
Struggling household sector weighs on GDP outlook
A struggling household sector – which is garnering the smallest slice of the nation’s economic pie in decades – is casting renewed doubts over official predictions of a near-term rebound from a first-quarter dip in growth. Hampered by a series of headwinds in the opening months of the year, including bad weather that slowed both construction work and export shipments from northern Australia, annual growth faltered to the weakest pace since the 2009 downturn.
Citigroup analyst Joshua Williamson said the accounts showed the wages share of GDP was at the lowest level since 1964…….
“The flip side of the weak wages share is the highest profits share of GDP since December 2011,” he said. “Hopefully the recent rebound in profits will feed into a stronger appetite for hiring and investment but so far the signs remain at best mixed.”
Author Jacob Greber
Source: Financial Review, June 7 2017:

4. Given the information in the above article, what components of GDP have been affected? How would this affect Aggregate Demand? Using the AD/AS framework, and assume that the economy was originally in the long run equilibrium, show what happens in both the short run and the long run. Including a graph in your answer.

Sample Solution