Question

Question 4 4.1. What are the main components of aggregate expenditure used to calculate nominal GDP? What are the main income categories used to calculate nominal GDP? 4.2. What is the link between cyclical unemployment, wage growth and the inflation rate? 4.3. What is price deflation? Is it desirable?

Answer 1

The major components of aggregate expenditure are:
Household consumption; the total amount of money that each individual spend for the purchase of goods and services.
Investment; The amount of money that people and business man who invested on capital. The amount which paid to purchase machines, purchase of building etc.
Government spending; the amount of money which government spend for the goods related to government needs.
Net exports; Net export measure the difference between total exports and total imports.
Nominal GDP is the measurement used to find the total economic value of goods and services at current prices. This nominal GDP having higher influence on inflation. The main income used here is the consumer price index (CPI). The CPI measure having huge influence among the consumers, which also have high level influence on consumer’s behaviour.
There is a negative relation between inflation, wage growth and unemployment. When the inflation increased the unemployment will be reduced through increasing wage rate. On the other hand, the rising wage level leads to inflation. With higher level of wages, there is a higher amount of cash with the workers. This will make the rise in inflation rate.
Deflation is the general fall in price level. If the inflation falls below 0 percent, it becomes deflation. There is a fall in the value of currency due to high inflation, the sudden deflation leads to the rise in the value. Deflation occurred with the high supply and low demand.