Economic Environment Of Business

Question: 1) What is the GDP gap? and Explain why comparing the GDP's of various nations might not tell you which nations people are better off. 2) What is the "market basket" used by the Australian Bureau of Statistics? Why does the "basket" of goods have to change over time? Give two examples of how the "market basket" has changed over time. 3) During the periods of economicdownturneconomists often note that the unemployment rate falls. They attribute this to the "discouraged worker effect". a) Define an "unemployed person" b)What is the "discouraged worker effect"? c)Why does this drop in the unemployment rate signal bad news? 4) Define the term "inflation". b)Inflation has different effects for different groups of people. Who benefits and who losers out from inflation? c)It is generally accepted that there are two broad types of inflation, demand-pull inflation and cost-push inflation. Describe both the cause and affect of each? Solution 1: GDP Gap The difference between the potential gross domestic product of a country and the potential actual domestic product for a specific period of time is known as GDP gap (Tucker, 2005). Potential GDP can be defined as the maximum GDP of the country which can be achieved through ideal production, high rate of employment across all the sectors with a stable currency and stability of the price of the products. The actual GDP of a country can be defined as an output which has been measured within a specific period of time. The potential output of the country which is wasted is measured. This defines the GDP gap. The GDP gap arises as a result of high rate of unemployment which takes place as a result of inefficiencies of the government and the business (Boyes and Melvin, 2011). GDP Gap = Potential GDP Actual GDP Comparison of the GDP of various Nations does not tell that which Nation is better The GDP of a country is calculated using complex methods. It cannot be considered as a perfect measure of the economic impulse of the country. However it is very important for the Government to devise the economic and social policies on the basis of gross domestic product. If the GDP of a country is not perfectly measured then it will give a false impression of the country. Thus comparison of the countries on the basis of GDP will not be a fruitful measure. The economic impulse of the country cannot be gauged from comparison of the GDP (Layton, Tucker and Robinson, 2011). Solution 2: Market basket can be defined as a group of products and services in a specific market. It refers to the products that are considered in terms of the fluctuating cost in the determination of the consumer price index. CPI measures the change in price of the goods over a period of time of a fixed market basket which contains more than 200 products. According to Australian Bureau of Statistics, the CPI basket is based on the data of expenditure of the actual household which has been derived from HES which is conducted by the ABS. The basket of goods can be conceptualized as a shopping basket. The shopping basket contains products for everyday use like clothes, food, furniture and financial services. There price of the whole basket changes with the rise or fall of the goods in the basket. This changes the overall price of the basket. The value of the basket of each year is compared. This helps in the determination of the inflation level. Examples of market basket In order to determine the price of the products used by the household, a survey is conducted by the Australian Bureau of Statistics in the entire nation to determine the spending habits of the residents. The results gathered from the survey helps to construct a market basket of products that is purchased by a typical family. It is seen in the figure that the products used by household can be divided into 11 categories. The employers of ABS conduct a survey to determine the price of the products in eight capital cities of Australia. The CPI is measured as the change in the price of the goods over the period of time consumed by the households in Australia (Valentine et al., n.d.). CPI = Amount required to purchase market basket of goods in the current year / Amount required to purchase the market basket of goods in the base year 2. Another example of market basket can be shown using three products. They are Pizzas, eye examinations and books. CPI = Expenditure in the current year / expenditure in the base year * 100 CPI in the year 2011 = ($900/$750) * 100 = 120 CPI in the year 2012 = ($915/$750) * 100 = 122 Using the market basket of goods, the CPI measures the change in price over the period of time (Hubbard et al., 2011). Solution 3 a.) Unemployed person An unemployed person is an individual who is jobless or refers to someone who does not have a job. The person is available for work but he is not being able to get the job (Arnold, 2001). b.) Discouraged worker effect - Discouraged worker effect means that someone is not looking for jobs as he believes that there is no job available. According to the Bureau of Statistics, discouraged worker refers to a person who wants to work but he is not looking for job for the past four weeks as they believe they will not get job due to some reason due to lack of demand for job in the particular field(Arnold, 2001). This effect is known as discouraged worker effect. It is seen according to statistics that the recent graduates, older workers and the minorities tend to become discouraged workers (Hamlin, 2015). c.) Fall in the rate of employment causes negative impact on the economy. The ripple effect caused by unemployment affects the overall economy and the community. High rate of unemployment results in the decline of the purchasing power of the consumers. This affects the sale of the company. The company suffers from loss in the business which has negative impact on the growth of the economy (Ryan, 2015). Solution 4 a.) Inflation Inflation can be defined as the rise in the general level of prices of the goods and services (Frisch, 2015). It is measured as an annual rise in the prices of the goods and services. b.) Gainers Debtors or the Borrowers The debtors utilize the loan when the purchasing power is high. But due to inflation, there is decline in the real value of money. Thus the debtors have to pay less to the creditors in real terms. Losers - The creditors are the losers. There will be reduction in the purchasing power from the repayment of the loan amount (Hall, 1982). c.) Demand pull inflation Cause The excess demand in the economy due to increase in the money supply in the economy results in demand pull inflation. It occurs in an economy which is expanding. Effect There is reduction in rate of unemployment. Cost push inflation Cause It is caused by the rise in the price of the inputs like labor, material. The rise in these factors of production results in fall in the supply of the goods. Effect The rise in the manufacturing goods will result in the rise in the price of related products (Economic Environment Of Business 2Nd Ed., 2015) ; (Gali , 2008). References Arnold, R. (2001). Economics. Cincinnati, Ohio: South-Western College Pub. Boyes, W., Melvin, M. (2011). Economics. Australia: South-Western Cengage Learning. Economic Environment Of Business 2Nd Ed.. (2015) (pp. 100-150). Frisch, H. (2015). Theories of Inflation (pp. 1-30). Gali , J. (2008). Monetary policy, inflation, and the business cycle. Princeton, N.J.: Princeton University Press. Hall, R. (1982). Inflation, causes and effects. Chicago: University of Chicago Press. Hamlin, K. (2015). What Is the Discouraged Worker Effect?. Small Business - Chron.com. Hubbard, G., Brien, T., Lewis, P., Garnett, A. (2011). Macroeconomics (2nd ed., pp. 200-300). Layton, A., Tucker, I., Robinson, T. (2011). Economics for Today (pp. 250-270). Ryan, T. (2015). The Overall Effects of Unemployment. Small Business - Chron.com. Tucker, I. (2005). Macroeconomics for today = Jin ri hong guan jing ji xue : di 3 ban. Beijing: Beijing da xue chu ban she. Valentine, T., Garrow, N., Garnett, A., Lewis, P., Hubbard, R., O'Brien, A. et al. Economic context of management