Question

 

Question 7 

If a country consistently runs net export surpluses, then what do you expect to happen to its exchange rate? Explain your answer.

Question 8  

Why is the measurement of unemployment problematic? Explain why, and on what occasions, the published unemployment rate may overstate or underestimate the actual unemployment of the economy.

Question 9 

What factors contribute to an economy’s growth in production? Can a country grow without limit by simply accumulating a factor of production? Can growth go on forever if certain resources are in finite supply?

Answer 1

Answer 7. The effect of net exports can be defined as, a higher price level increases the relative price of domestic exports to other countries while decreasing the relative price of foreign imports from other countries. This results in a decrease in exports and an increase in imports and thus a decrease in net exports.

The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, a weaker domestic currency stimulates exports and makes imports more expensive, whereas a strong domestic currency hampers exports and makes imports cheaper. The balance of trade influences currency exchange rates through its effect on the supply and demand for foreign exchange. If a country exports more than it imports, there is a high demand for its good and thus for its currency. In contrast if a country imports more than it exports, there is relatively less demand for its currency, so prices should decline. In case of currency, it depreciates or losses value.

A country with a current account surplus will have surplus foreign exchange it can use to invest in other countries. There is no fixed rule about what will happen if a country has a current account surplus. It depends on the size of the current account and the reason for current account surplus.

Answer 8. The Federal Reserve uses unemployment rate as an important indicator to determine the health of the economy when setting monetary policy. Investors also use current unemployment statistics to look at which sectors are losing jobs faster. Unemployment can cause underemployment and fear of job loss increases stress.

Measuring unemployment accurately is made difficult because of imperfect knowledge. The employed are eligible for benefits, some individuals may work, but not disclose it, and claim benefit. Conversely, many unemployed may not bother to inform the authorities and this unemployment goes unrecorded. The unemployment rate isn't an accurate measure of joblessness simply because it doesn't consider everyone who doesn't have a job. Unlike official unemployment rate, however, it takes underemployed and marginally attached workers into consideration as well as unemployed people.

The natural rate of unemployment is the rate of unemployment that corresponds to potential GDP or, equivalently, long-run aggregate supply. Unemployment is measured  in order to determine the unemployment rate. The rate is a percentage that is calculated by dividing the number of unemployed individuals by the number of individuals currently employed in the labor force.

Answer 9. Factors that affect the economic growth of a country:

Human Resources: The quality and quantity of available human resources can directly affect the growth of an economy.

Natural Resources: It involves resources that are produced by nature either on the land or beneath the land, includes plants, water resources and landscapes.

Capital Formation: Capital formation increases the availability of capital per worker, which further increases capital or labor ratio.

Technological Development: It helps increasing productivity with the limited amount of resources. Inappropriate technology results in high cost of production.

The growth of the country without limit is not possible as there are other external factors that play a significant role as a road blocker for the growth of economy. Growth cannot go on forever if certain resources are finite as continuous supply is required for a continuous growth.