Question

If Net Investment = 0 in a given year, this indicates that we have neither lost nor gained capital. That seems to be a desirable outcome. Do you agree?

Nominal GDP rose by more than $1 trillion between 2015 and 2016. We can therefore be sure that the economy expanded. Critically evaluate.

Answer 1

Answer 1:

No, this is not a desirable state for the economy because economy has not grown in these years and the productivity has not increased and thus total production has remained constant in these years. Thus, economy is in a steady state from where it is not growing further because capital stock is constant and thus output is constant. Thus, Net investment equal to zero is not a desirable outcome for the economy as the economy is not on the growth path.

Answer 2;

The statement states that Nominal GDP which measures the value of goods and services at the current prices is increasing . But this cannot be stated that economy has expanded in this case. Because it might happen that prices have risen and quantity produced by the nation has remained constant and this has caused the value of Nominal GDP to increase as the prices are evaluated at current prices. Instead of Nominal GDP, if the value of Real GDP was taken then we can be sure that the economy has expanded because Real GDP of the nation considers the market value of goods and services at constant prices rather then current prices.