Question

Answer the following macroeconomics questions.
a) What is the difference between nominal GDP and real GDP? Which one of them is used to calculate the economic growth rate? Justify your answer.
b) Give the equation used to calculate the unemployment rate. State the different types of unemployment. In your opinion, which type is the most problematic one? Justify your answer.
c) Governments may achieve certain economic goals; say controlling inflation, by implementing fiscal and/or monetary policies. Explain briefly the difference between fiscal and monetary policies.

Answer 1

a. Nominal GDP is the total value of the output produced in an economy in a given year at the current prices. The real GDP, on the other hand, is the total value of the output produced in an economy in an year at the base prices or the constant prices. Note that the change in the nominal GDP does not only imply a change in the output, but this could be a change due to prices only. Hence the real GDP is used to find the change in the output of an economy to measure economic growth.

b. The unemployment rate is the share of the total unemployed persons in the labor force.

Unemployment rate= Total unemployed persons/Labor force

The labor force is the sum of employed and unemployed persons and also note that the unemployed persons are those persons who are not employed and also actively looking for a job.

Different types of unemployment are structural, cyclical, and frictional unemployment.

Structural unemployment considers the unemployed persons which are due to the changing structure of the economy in terms of changing industrial stricture. The cyclical unemployment is due to the changing business cycle which means that this kind of unemployment increases when the demand in these seasonal decreases and vice versa. Frictional unemployment happens when people switches between the jobs and remain unemployed for a shorter duration of time. The structural unemployment is worst of all because to eliminate this, the economy needs to bring the change in the structure of the economy, maybe from the agricultural economy to a capitalist economy.

c. The fiscal policy considers the tools of the taxes and government expenditure to active the economic goals while teh monearty policy is associated with the central bank which tends to bring changes in teh money supply and teh interest rates in teh economy and hence affect the investment and thus teh GDP level in teh economy. The fiscal policy is undertaken by teh government associating with the political motives while teh monetary policy is independent of it and is undertaken by the central bank.