Question

1. What are the two options for calculating GDP? What are the key differences and why are they important? Why are CPI & the GDP deflator important considers for evaluating the GDP? What impact will the countries government debt have on the economy?
2. What is the significance of considering LRAS & SAS in the Macro S & D model?
3. What do the above economic factors indicate about the current state of our economy?

Answer 1

Q) The two options for calculating GDP are expenditure method and income method.

Expenditure method includes purchases or spending of final goods and services produced in a country in an accounting year. It is expressed as

Y(GDP) = C+ I + G+ NX.

Income method includes total factor income ie all the wages, Salaries, income of residents of a country earned in a year on final goods and services produced. It includes corporates profit, supplementary income, rent.

Calculating GDP by either methods are yoelds equal results.

CPI and GDP deflators meaures the rate of change of price level in the economy. They are an important tool in knowing whether an increase in the GDP is increase in prices or increase in quantity of goods and services or both.

A desirable ratio of debt to GDP is 60%. An increase in the ratio beyond the desirable level have an adverse impact on the economy. Government may not get other loans to complete the work. Credit rating agencies may downgrade the country's economy resulting in lower or no foreign investment. Interest rate will rise, which makes borrowing costly.

Economy takes time to reflect any policies impleted by either government (fiscal policy) or central bank(monetary policy). LRAS curve shows the long run potential level of output where all factors of production are employed efficiently and unemployment is at its natural level. In contrast, SRAS curve shows the immediate impact of a policy change. At this point output is less than full employment level. SRAS curve shifts accordingly to reach at potential level of output.

The current status of the economy is severerly affected by COVID 19.The economy has entered into recession phase. In an attempt to contain the spread of pandemic, whole nation is put under lock down. Thus major economic activities has come to halt.