Real GDP of Country

Question: Discuss about the Real GDP of Country. Answer: Introduction: In order to measure the standard of living of a country, the real GDP might be considered as an unreliable indicator to some extent. Precisely, there are two major issues to be dealt with in order to compare the living standard across countries. First of all, each of the countries has there definite currency to measure the overall real GDP. For instance, if one compares the standard of living in the United Kingdom and China, the real GDP must be converted in the same currency to define the status. Moreover, due to the massive population in China, the overall GDP of China will be much higher than that of the United Kingdom. Meanwhile, the overall real GDP figure can be misleading at times as the entire figure of real GDP cannot signify the living standards (Williams, 2013). On the other hand, the per capita income of the population may define the real status of living standards. Hence, on the basis of the per capita income, the standard of living should be monitored. Apart from that, the value of the goods and services of the comparing countries can be a challenging task as well. For instance, the value of goods and services in China and the United Kingdom has been priced in different currencies (Mariano and Murasawa, 2010). Hence, to define the standard of living of the population, the prices should be compared to a standard currency i.e. US dollar. Clearly, the determined problems must have been faced if the real GDP of two countries can be utilised as the indicator of living standards. Unemployment has been identified as one of the most common issues in developing as well as emerging economies. Precisely, there are three types of unemployment to be considered. First of all, in an economy, a number of people have quit their job in search of better opportunity (Lange and Georgellis, 2007). Therefore, after quitting a job, they have to be remained unemployed for a specific time before getting new jobs. As a result of the scenario, job searchers create unemployment to an economy called frictional unemployment. Secondly, in growing economic conditions, structural unemployment has been another major type of unemployment. In this category, the demand for particular workers has not particularly matched to the available quality and skills of human resources. Hence, the demand of available labours has been decreased contributing to the rate of unemployment (Cho, 2010). Finally, cyclical unemployment has influenced due to the insufficiency of effectual labour demand. Meanwhil e, advanced economies have to deal with recessions in the economic cycle. As the result of recessions, the companies have to cut down the number of employees creating cyclical unemployment. Clearly, modern developed as well as emerging economies have to undergo different economic scenarios. Therefore, some of the unemployment has found to be unavoidable. For instance, some of the employed community has left their jobs to seek better job opportunities contributing to frictional unemployment. Also, rapid technical expansion in the economies has created more job opportunities for skilled labours promoting structural unemployment. Lastly, unwanted recessions have largely contributed to job cuts in major economies. Therefore, such critical scenarios have made some unemployment situation unavoidable. Inflation can be identified as the continuous increase in the general or average price level for services and goods that are generally consumed on a regular basis. Hence, an increase in the average level of prices of goods and services leads to inflation. For example, the price of sugar, vegetable, and other consumable products increases by around 10 percent within a year. Therefore, the inflation rate will be around 10 percent in the economy. Notably, the rise in the average level of price with the same value as compared to the previous year will not lead to rise in inflation rate (Hubbard et al., 2015). In other words, the inflation rate increases only when the average price level of goods and services increases by a higher percentage as compared to the previous year. On the other hand, the rise in the average price level must be continuous in nature. For instance, the average price of goods and services must increase on a sustained basis to consider it as a factor leading to inflation (Mankiw, 2007). One of the primary factors is the increase in the flow of money in the market that diminishes the buying power of the currency and fronts to rise in the price of goods and services that further leads to inflation in the country. Hence, it is important to note that the given statement is true only when the increase in the average level of price of goods and services is more than the rise in the average price level in the preceding year. The Aggregate Demand (AD) curve illustrates the quantity of services and goods demanded by the consumers at a given price level. The AD curve presents the price and demand relationship in a market. It is important to note that the AD curve slopes downward because of the interest rate effect and wealth effect (Krugman and Wells, 2005). An aggregate demand curve has been presented in the figure given below for further explanation: It can be seen from the above diagram that the fall in the general price level results to the rise in the demand of the products and services from Y1 to Y2 that further leads to a downward sloping AD curve (Arnold, 2011). The common misunderstanding about the AD curve is that people buy more things when the price falls. In actual scenario, it is important to note that economists assume that the flow of money in the market remains constant. On the other hand, when the aggregate price level of services and goods increases the purchasing power of the currency decreases that leads to fall in the quantity demanded. It makes the consumers to reduce the amount of purchases. On the other hand, when the aggregate price level decreases, the consumers feel wealthier and buy more products and services (Arnold, 2011). Hence, there is an inverse relationship between the combined quantity demanded and combined price level of services and products. Furthermore, the interest rate also leads to a downward sloping AD curve. The increased demand for currency leads to increase in the interest rate that reduces the surplus amount to be spent in the market. The aggregate supply curve presents the aggregate amount of services and goods that are supplied by firms in an economy for a given price level. It is important to note that the LRAS (long-run aggregate supply curve) is perfectly vertical in nature because of the capital, technology and labour factors that influences the quantity supplied in the market (Pindyck and Rubinfeld, 2011). It is assumed that the technology, labour and capital is optimally used in the long run and any increase or decrease in the price level will not impact the aggregate supply in the market. A diagram has been presented herein below for further explanation: It can be seen from the above figure that the LRAS curve is static in nature and shifts only when any of the resources such as labour, capital or technology is changed. Hence, a change in the aggregate demand will lead to a small change in the total output of the economy. On the other hand, the short run aggregate supply curve is upward sloping because the increase in the price can be used to increase the amount of capital, labour and technology that are employed to produce a particular amount of goods and services (Pindyck and Rubinfeld, 2011). Hence, in the short run, the firms can increase its production by investing in the production process that helps to increase the level of supply in the market. A diagram has been presented below for better understanding: References Arnold, R. (2011). Microeconomics. 1st ed. Australia: South-Western College Pub. Cho, A. (2010).Economics Nobel: Why Unemployment Is Inevitable. [online] Science | AAAS. Available at: https://www.sciencemag.org/news/2010/10/economics-nobel-why-unemployment-inevitable [Accessed Jan. 2017]. Colander, D. (2008). Microeconomics. 1st ed. Boston, Mass.: Irwin/McGraw-Hill. Hubbard, G., Garnett, A., Lewis, P. and O'Brien, A. (2015). Macroeconomics. 3rd ed. Pearson Australia. Krugman, P. and Wells, R. (2005). Microeconomics. 1st ed. New York: Worth. Lange, T. and Georgellis, Y. (2007).Active labour market policies and unemployment. 1st ed. Bradford, England: Emerald Group Pub. Mankiw, N. (2007). Macroeconomics. 1st ed. New York: Worth Publishers. Mariano, R. and Murasawa, Y. (2010). A Coincident Index, Common Factors, and Monthly Real GDP.Oxford Bulletin of Economics and Statistics, 72(1), pp.27-46. Pindyck, R. and Rubinfeld, D. (2011). Microeconomics. 1st ed. Upper Saddle River, N.J.: Prentice Hall. Williams, R. (2013).Why the GDP Is Not An Good Measure of A Nation's Well Being. [online] Psychology Today. Available at: https://www.psychologytoday.com/blog/wired-success/201309/why-the-gdp-is-not-good-measure-nations-well-being [Accessed Jan. 2017].