Question

A) Compare the different measures of inflation known as GDP deflator, the Producer Price Index and explain how to calculate the real interest rate.

B) Frictional unemployment and the natural rate of unemployment also seem to depend on the age distribution of the population. Describe why this is so.

Answer 1

A)

1) GDP Deflator -

The GDP deflator is a measure of inflation and is also called the implicit price deflator. It records the general price level changes of an economy in the output of final goods and services of one year included in gross domestic product, GDP deflator shows the amount of change in GDP due to inflation and not an increase in output.

GDP deflator = (Nominal GDP/Real GDP)*100

Nominal GDP is measured at the current years prices While the Real GDP is measured at the base year prices.

It takes into account all goods and services in an economy so it's a comprehensive measure of inflation in the economy and its measure the price change at the end of the supply chain that is at the last stage where goods and services are purchased for the final use.

2) Producers Price Index

The Producer Price Index is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This is against the other measures, such as the Consumer Price Index (CPI), a GDP deflator that measures price change from the purchaser's perspective. Sellers and purchasers prices may differ due to government subsidies, sales and excise taxes, and distribution costs, etc.

3) Real Interest Rate

The real interest rate is always adjusted for inflation that is the increase in the general price level. Inflation leads to a fall in the real value that is the purchasing power of the money. it is calculated as,

Real Interest Rate = Nominal interest rate - Inflation

B) The natural rate of unemployment is the rate that occurs in the economy even if the economy is healthy. It's a combination of frictional, surplus, and structural unemployment. It occurs due to the combination of social, economic, and political factors that exist at a time such as a change in economic structure or public policies and so on. Frictional unemployment occurs due to the change in technology, management, shift in the test, and preferences, and organizational change in the economy. it counts the time for the shifting job, searching for a new job, pregnancy leave, and another short term frictional empty time.

Frictional unemployment and the natural rate of unemployment also seem to depend on the age distribution of the population. It's typically lower for the population between the age group of 25-54 years than those who are either younger or older. Peoples between the age group 25-54 are the prime-age workers who have a job and secured income stream. but the population in younger age such as less than 30 years are the one who is going to entre in the job market and trying for the new jobs and positions and the population over 55 years of age is are eying retirement. Thus, a society with a relatively high proportion of relatively young or old workers will tend to have a higher unemployment rate than society with a higher proportion of its workers in middle age (25-55).