Macroeconomics Assignment

Questions: Table 1: GDP Data for Countries A and B Country A Country B $billions $billions Household Consumption 150 150 Government Purchases 250 250 Transfer payments 50 60 Total Gross Fixed Capital Expenditures 50 150 Change in Inventories 50 -50 Exports 40 40 Imports 20 20 Consider the data in table 1 for two countries: A and B. a. Calculate the GDP for both countries. b. Discuss the usefulness of these data in deciding which, if any, of these two countries is likely to be experiencing an economic recession. Answers: a. Gross Domestic Product is the fundamental indicator to measure the economic health of a country. It is the total value of final goods and services produced in a country for final user. It is generally measured annually to observe the annual change in an economy (Egerer, Langmantel and Zimmer 2016). The components of GDP are investment; government expenditure; private consumption and net trade balance, i.e., GDP= Investment (I) + Government Expenditure (G) + Consumption (C) + [Export (X) Import (M)]. Total Gross Fixed Capital expenditure and changes in Inventories are the indicators of investment. Household consumption falls under consumption. The purchases made by government are the government expenditure. The transfer payment is not considered as a component of GDP. This is because; it is a one-way transfer of money and involves on exchange of goods and services. This implies that this money does not create any value to the production of the country. Therefore, from the given data, the transfer payment will not be taken into account while calculating the GDP of the country A and B. For Country A, GDP = I +G + C + (X M) GDP= Total Gross Fixed Capital Expenditure + Inventories + Government Purchases + Household Consumption + (Export Import) $ [50 + 50 + 250 + 150 + (40 20)] billion = 520 billion dollars For Country B, GDP = I +G + C + (X M) GDP= Total Gross Fixed Capital Expenditure + Inventories + Government Purchases + Household Consumption + (Export Import) $ [150 50 + 250 + 150 + (40- 20)] billion = 520 billion dollars b. In the given data of two countries, the values of each component are same. However, the total fixed capital expenditure and changes in the inventories are the two components whose values are different. Therefore, by comparing these two components the economic scenario can be assessed. Gross Fixed Capital Expenditure is the acquisition value of fixed assets. In includes the changes in net physical assets and does not take into account the components of investments like stock of inventories; financial assets; exchange of land etc (Robinson 2013). However, improvement in the value of land is considered as fixed capital expenditure. The countries with rapid economic growth invest huge amount in fixed capital assets. Therefore, when the fixed capital expenditure is increased then the country is in a prosperous condition and this in turn will further increase the gross fixed capital expenditure. Poorest countries cannot afford investment. Hence, when this indicator of GDP tends to fall it implies that there will be a fall in the GDP as well (Bodie 2013). Therefore, as an economy is approaching towards the recessionary phase, the Gross Fixed Capital Expenditure declines. In the given case, the Gross Fixed Capital Expenditure is more in country B than country A. Hence, economic situation in country B is better than the other one. The changes in inventory indicate the rise or fall in the stocks of final goods. Inventories can be changed planned wise. It is the flow of stocks of unsold goods. Therefore, it is a component of investment. When inventories is accumulated, which is unplanned, implies that the produced goods are not sold (Van Deusen, Roesch and Wigley 2013). Therefore, the business will cut down its production, as there is lack of demand in the market. Since production is reduced it means that economy is moving towards recession. Similarly, if the inventories start to clear out, this indicates that demand is generating. So economy is not going to face any kind of downward movement in near future. In the given case, the country Bs inventories indicates a negative change, which implies the inventory is getting cleared. This is a good sign for an economy. In contrast, the inventory is accumulating in country A, indicating lack of demand in the economy. Hence, this countrys situation is worse than countr y B. Combining the changes in these two components, country A is more likely to be experiencing the economic recession.