Week_5_Project_Part_2_2.doc

7/27/2019 Week_5_Project_Part_2_2.doc

1/5

Venkata Addanki

Business Economics

ECON545

Sep 2013 - Nov 2013

[email protected]


2/5

Exercise 1 Chapter 15 Question 11:

Year GDP C I G X-M C(%) I(%) G(%) X-M(%)1965 719.10 443.80 118.20 151.50 5.60 61.72 16.44 21.07 0.78

1975 1638.30 1034.40 230.20 357.70 16.00 63.14 14.05 21.83 0.98

1985 4220.30 2720.30 736.20 879.00 -115.20 64.46 17.44 20.83 -2.73

1995 7397.70 4975.80 1144.00 1369.20 -91.40 67.26 15.46 18.51 -1.24

2005 12455.80 8742.40 2057.40 2372.80 -716.70 70.19 16.52 19.05 -5.75

a. Which component is the most stable?

The government spending (G) seems to be the more stable component with an average of

20.25% of GDP for the forty years in review. The government spending G includes the

salaries and wages of government employees (federal, state and local) and the purchase of

goods and services, the purchase of new structures, equipment and software. G has

increased over the period, representing almost 1/5 of the GDP; it means that the

government has played a stable and active role in the U.S. economy.

b. Which component is the most volatile?

The most volatile component has been the Net Export. Representing 0.8% of GDP in 1965,

it was -2.7% of GDP in 1985, -1.2% in 1995 and -5.7% of GDP IN 2005. It also shows that

the U.S. economy has been more dependent on imports.

c. Ignoring the net export, which has grown the fastest as percentage of the GDP?

The personal consumption expenditure C has increased from 61.72% of GDP to 70.19% in

2005. This indicates that the internal consumption has been the major drive of the growth of

the economy for the period under review.


3/5


Cyclical Unemployment will be a result of businesses not having enough demand for labour to employ

all those who are looking for work. The lack of employer demand comes from a lack of spending and

consumption in the overall economy. When business cycles are at their peak, cyclical unemployment will

be low because total economic output is being maximized. When economic output falls, as measured by

the GDP, the business cycle is low and cyclical unemployment will rise. It could be reduced by using

demand side policies like expansionary fiscal policy of cutting taxes and increasing government

spending and/or supply side monetary policy like cutting interest rates which decreases cost of

borrowing and encourage people to spend and invest. Recent Cash for Clunkers is one such example

which used to increase consumer spending.

Structural Unemployment happens because of changes in the structure of an economy is a more long-

term and chronic type of unemployment. Structural unemployment does not follow variations in the

business cycle. Rather, it is caused by a discrepancy of the skills of the worker and the demand for those

skills in the marketplace. Structural unemployment often occurs when there is demographic change,

large-scale industrial layoffs, and/or a mismatch between skills and available jobs (i.e., due to

technological advances). Government training programs, providing subsidies to firms that provide

training to displaced workers, relocation services and education support for prospective employees are

some of ways to reduce.

Frictional unemployment occurs because it takes some time for workers find new jobs before they

leave their old ones, a lot of workers leave or lose their jobs before they have other work lined up. In

these cases, a worker must look around for a job that it is a good fit, and this process takes some time.

During this time, the individual is considered to be unemployed, but unemployment due to frictional

unemployment is usually thought to last only short periods of time. This is particularly true now that

technology is helping both workers and companies make the job search process more efficient. Frictional

Unemployment could be reduced by means of providing Education Advice, Computerized national job

database for easy search, Incentives and regulations, Relocation of industries and services and Aids and

grants to overcome specific obstacles (provisions for disabled workers etc.)


4/5


A fixed exchange rate system is one where the value of the exchange rate is fixed to another currency.

This means that the government have to intervene in the foreign exchange market to maintain the fixed

rate. The equilibrium exchange rate may be either above or below the fixed rate. There is a shortage of

the national currency at the fixed rate. This would normally force the equilibrium exchange rate upwards,

but the rate is fixed and so cannot be allowed to move. To keep the exchange rate at the fixed rate the

government will need to intervene. They will need to sell their own currency from their foreign exchange

reserves and buy overseas currencies instead. This has the effect of shifting the supply curve and as a

result, their foreign currency holdings will rise.

Fixed rates provide greater certainty for exporters and importers

Fixed exchange rates forces strong discipline on domestic firms and employees to keep their costs

under control in order to remain competitive in international markets.

Floating exchange rate will be determined by market forces that is supply and demand. As in any

other market, the rate will change constantly to reflect how much of the currency is being traded.

Fluctuations in the exchange rate can provide an automatic adjustment for countries with a large balance

of payments deficit. If an economy has a large deficit, there is a net outflow of currency from the country.

This puts downward pressure on the exchange rate and if depreciation occurs, the relative price of

exports in overseas markets falls (making exports more competitive) whilst the relative price of imports in

the home markets goes up (making imports appear more expensive).

Floating exchange rate resolves trade imbalance

Flexibility in determining interest rates for government


5/5

References:

Gerald W. Stone (2008). Core Economics First Edition 2008 Worth Publishers.

http://www.economicswebinstitute.org/glossary/gdp.htm

http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-

rates-supply-and-demand/central-banks/

http://www.voxeu.org/article/exchange-rates-fixed-or-flexible-does-it-matter

https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/china-us-

debt-situation/v/floating-exchange-resolving-trade-imbalance

http://www.helium.com/items/1551000-frictional-unemployment-structural-unemployment-and-cyclical-

unemployment

http://www.philipharvey.info/secbookpdf/Chapter3.pdf

http://www.economicshelp.org/blog/3881/economics/policies-for-reducing-unemployment/

http://en.wikipedia.org/wiki/Car_Allowance_Rebate_System
http://www.economicswebinstitute.org/glossary/gdp.htmhttp://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-rates-supply-and-demand/central-banks/http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-rates-supply-and-demand/central-banks/http://www.voxeu.org/article/exchange-rates-fixed-or-flexible-does-it-matterhttps://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/china-us-debt-situation/v/floating-exchange-resolving-trade-imbalancehttps://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/china-us-debt-situation/v/floating-exchange-resolving-trade-imbalancehttp://www.helium.com/items/1551000-frictional-unemployment-structural-unemployment-and-cyclical-unemploymenthttp://www.helium.com/items/1551000-frictional-unemployment-structural-unemployment-and-cyclical-unemploymenthttp://www.philipharvey.info/secbookpdf/Chapter3.pdfhttp://www.economicshelp.org/blog/3881/economics/policies-for-reducing-unemployment/http://en.wikipedia.org/wiki/Car_Allowance_Rebate_Systemhttp://www.economicswebinstitute.org/glossary/gdp.htmhttp://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-rates-supply-and-demand/central-banks/http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-rates-supply-and-demand/central-banks/http://www.voxeu.org/article/exchange-rates-fixed-or-flexible-does-it-matterhttps://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/china-us-debt-situation/v/floating-exchange-resolving-trade-imbalancehttps://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/china-us-debt-situation/v/floating-exchange-resolving-trade-imbalancehttp://www.helium.com/items/1551000-frictional-unemployment-structural-unemployment-and-cyclical-unemploymenthttp://www.helium.com/items/1551000-frictional-unemployment-structural-unemployment-and-cyclical-unemploymenthttp://www.philipharvey.info/secbookpdf/Chapter3.pdfhttp://www.economicshelp.org/blog/3881/economics/policies-for-reducing-unemployment/http://en.wikipedia.org/wiki/Car_Allowance_Rebate_System

Week_5_Project_Part_2_2.doc

Documents

Transcript of Week_5_Project_Part_2_2.doc