Assignment: GDP and Economic Growth
In this Assignment, you will evaluate the various components of the Gross Domestic Product (GDP) and factors that affect the GDP components. You will also compute the growth rate of U.S. real GDP and compare the average with the expected growth rate of U.S real GDP.
Instructions: Answer all of the following questions. You are required to follow proper APA format. Read the Criteria section below for more information before you begin this Assignment.
In this Assignment, you will be assessed on the following outcome:
MT445-6: Evaluate the effects of globalization and international trade on the U.S. economy.
GDP and Economic Growth
Components of GDP and Growth Rates of Real GDP
- Why does inflation make nominal GDP a poor measure of the increase in total production?
Nominal GDP refers to the market value of all final goods and services produced in a country and considering the current-year market prices. The latter fact makes nominal GDP a poor measure of the increase in total production since part of the figure reflects price changes rather than actual increases in production levels (Goodwin, 2008).
- Which component of GDP will be affected by each of the following transactions involving FlyCheap Airlines? Briefly explain.
Hint: GDP = C + I + G + Nx
- You purchase a ticket on a FlyCheap Airlines to visit your niece.
The component of GDP affected is consumption (C). Purchasing an air ticket is part of consumption expenditure, since the consumption component includes purchase of durable and non-durable goods as well as expenditure on services such as education, transportation, and others.
- FlyCheap Airlines purchases a new jetliner from Boeing.
This transaction will affect investment (I) component of the GDP. Investments reflect capital additions to the available physical stock over time. FlyCheap added to its physical stock of capital by purchasing the jetliner, which is meant to create more goods or services.
iii. FlyCheap Airlines purchases new seats to be installed on a jetliner it already owns.
Purchase of new seats is an investment (I). This is because purchase of seats still reflects additions to the physical stock of capital. The new seats are a form of business fixed investments.
- FlyCheap Airlines purchases 200 million gallons of fuel.
This does not affect any component since this is only an operating expense.
- A French citizen purchases a ticket to fly on a FlyCheap flight from Paris to New York.
This represents the net exports (Nx) component. This is because in purchasing the FlyCheap ticket, the country is exporting services and receiving a price.
- The city of Nashville agrees to spend funds to extend one of the runways so that FlyCheap will be able to land larger jets.
This represents the government expenditure (G) component of the GDP. This is because the component represents the government spending on various goods and services.
- Use the table to answer the following questions.
|Year||Real GDP (Billions of 2000 Dollars)|
- Calculate the growth rate of real GDP for each year from 1993-1994, 1994-1995, 1995-1996 and 1996-1997. Show your work.
1993 – 1994: (7,101 – 7,113)/7,113 = -0.2% growth rate.
1994 – 1995: (7337 – 7,101)/ 7,101 = 0.03 or 3.3% growth rate.
1995 – 1996: (7,533 – 7,337)/7,337 = 0.03 or 2.7% growth rate.
1996 – 1997: (7,836 – 7,533)/7,533 = 0.04 or 4% growth rate.
- Calculate the average annual growth rate of real GDP for the period from 1993 to 1997.
Hint: Compute the average for the growth you calculated under (i) above.
The average annual growth rate is: (-0.2 + 3.3 + 2.7 + 4)/4 = 2.5%.
iii. How does the average annual growth rate you calculated in (ii) above compare to the average GDP growth rate the U.S. normally expects?
The average annual growth rate calculated in (ii) is almost similar to the average GDP growth rate obtains. For instance, basing on data from The World Bank (2016), the U.S. had an average GDP of 2.2% from 2012 to 2015.
- In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of furniture manufactured in China. Answer the following:
- Which component(s) of GDP are impacted by this purchase?
The component that changes is net exports (Nx), or the difference between spending on foreign goods and the value of exports.
- Does GDP increase, decrease or stay the same? Briefly explain.
The GDP decreases. This is because importing the furniture means taking money away from the domestic economy and to a foreign economy. Thus, the level of GDP decreases.
- Does your answer change if the company in China is a U.S. owned company? Why?
The answer would not change since calculation of GDP takes into consideration the value of goods and services produced within the borders of a country. As such, the furniture would still count as imports.
- Describe the relationship between labor productivity and long term economic growth. How do technological advancements impact labor productivity?
There exists a positive correlation between labor productivity and long-term economic growth. When labor productivity increases, long-term economic growth also increases (Cahuc, Carcillo, & Zylberberg, 2014). Labor productivity increases when workers are more efficient in what they do, basing efficiency purely on the value each worker produces per unit of input and as per the time they take. Technological advancements improve labor productivity. This is because through technological advancements, workers are able to produce more goods while using fewer resources and time.
Cahuc, P., Carcillo, S., & Zylberberg, A. (2014). Labor economics. Cambridge, MA: MIT Press.
Goodwin, N. (2008). Microeconomics in context. New York, NY: M.E. Sharpe.
The World Bank. (2016). Global economic prospects: divergences and risks. Retrieved from http://www.worldbank.org/en/publication/global-economic-prospects#data