The way the GAP is calculated varies depending on the economist, as well as the country. Real GAP Real GAP is adjusted for inflation. Using price levels for a basket of products or services, certain conglomerates of economists carry out the collection and analysis of vast amounts of data in order to measure inflation. By knowing the increase in price levels, economists can know the inflation ratio for the given period and subtract it from the Nominal GAP in order to find the inflation- adjusted or deflated GAP Nominal GAP The nominal GAP is the GAP before adjusting it for inflation.
Unemployment rate The actual unemployment rate is the percentage of people out of the workforce who are willing and able to work, but can’t get a job. The target unemployment rate is the lowest sustainable unemployment rate at the economy’s highest efficient production capacity. Inflation rate The inflation rate is the percentage rate of increase of the price levels measured. One common index is the Consumer Price Index or ICP, which measures the price levels changes in a variety of products and services including rents.
By measuring the changes in price levels, economists can also measure the devaluation of the runners, or its decrease in buying power. Interest rate The interest rate is the periodic cost of borrowing money or contracting a debt. In most financial scenarios is common to use an annual interest rate. Interest rates vary depending on the industry, but at the top levels of the economy interest rates are usually tied-up to an index, or to the rates of government bonds, etc. Economic activities and their effects Purchasing of groceries is a main necessity in any society.
The Bureau of Labor statistics shows food as a category covering 12 percent of the Consumer Price index Basket. Whichever way the scale tilts, it will affect a segment of society. When people purchase groceries at a steady pace, businesses that sell those products benefit from the income and might in turn create new jobs that would eventually generate taxes. When the government subsidizes the production of certain products, the cost reduction for the consumer creates more demand and generates more income to tax-paying jobs.
Similarly, when subsidies end, or demand for products decreases, so does the total available resources for production which generates scarcity and increases in price levels. Massive lay- offs could adversely affect the economy by decreasing the amount of taxes that are collected, increasing expenditures in social welfare programs, and pushing inflation up. Less people in the workforce also means less possible output for the economy, and less available resources for production. All of these factors can slow the economy, and as their magnitude increases, could even put the economy at risk of a recession.
The government is forced to institute programs to generate jobs, and households are stretched thin with the loss of a stream f income, regardless of whether or not there is another salary coming in. Decreases in taxes have both positive and negative effects. The general idea is that lowering taxes (particularly for businesses) can inject some growth to the economy. Reduced taxes allow companies to hire more workers, or to invest in research and development. Businesses in turn will add more income to the government in the form of extra taxes generated by the increased production.
Those jobs would also put some money on the hands of individuals, who could hen spend more to improve their quality of life, while also paying more to the government in the form of sales tax. This was the rationale behind President Bush’s tax cuts. On the other hand, others argue that those tax cuts should go directly to the citizens, not corporations, in order to more evenly distribute the wealth and stimulate the economy from the root.
The Harrod-Domar Model is the simplest and best-known production function used in the analysis of economic development. This model explains the relationship between the growth and unemployment in advanced capitalist societies. However, the Harrod-Domar Model is used in developing nations as an easy way of looking at the relationships between growth and capital requirements. This model does explain the differences in growth performances between countries. The model allows you to predict an estimate of growth for a nation. Which can be compared to predictions of growth for a different country.
The “sources of growth” is a different form of the production function. This new function gives the analyst the ability to separate out the different causes of growth. The factors of this equation concern the growth rate of any variable, share of income in any input, national product, capital stock, labor, arable land & national resources, and measuring the shift in the production function resulting from greater efficiency in the case of inputs.
Growth Accounting Analysis takes into account of two conclusions that are due to the variations in the way different economists carry out growth accounting. The analysis shows that the efforts to measure the sources of growth have shown that increases in productivity really account for the higher relation of growth. Also capital does not give as much to growth as assumed in early growth models. Capital does play a major role in the expansion of contemporary developing nations. An example of the analysis is in the comparison of wages. Perhaps the wages of a high school graduate is equivalent to the salary of 2 workers who have only had grade school education. Also the earnings for a college graduate maybe twice the amount of a worker of only high school education.
Both the balanced and unbalanced growths predate much of the quantitative work on patters of development. Balanced growth agrees that countries have to develop a wide range of industries all at the same time if they are ever to prosper in attaining sustained growth. This is when the population of that nation will all have enough wealth to buy goods that they produce. While in an unbalanced growth, only one or few industries prosper, giving wealth to those only working in those areas. In a balanced growth mostly everyone will prosper from the industry. Whereas in an unbalanced growth only a selected few will achieve any gains.
Income distribution is split up into two categories, functional and size distributions of income. Both distributions of income are interrelated. Functional distribution of income shows how national income is divided among factors of production, traditionally identified as land, labor, and capital. This can be used to measure the productive contributions made by the different factors. Size distribution of income shows the amount of income of all functional kinds received by the rich, poor, & middle class individuals or families and is often read as a direct measure of welfare.
The evidence regarding inequality and growth shows that it is necessary for economic growth but there is not enough for improving the living standards of large numbers of people in countries with low levels of GNP per capita. Sometimes governments promote growth not just to increase the welfare of their citizens but also to bigger the power and bring glory to the state and its rulers. For example when a country buys missiles and nuclear weapons, they spend large amounts of money, which do not really provide much benefit to the country’s citizens. Also resources may be greatly invested in further economic growth, with important utilization increases deferred to a later date. As well, the income and consumption may amplify but only those that will benefit are those who may not need them. As the saying goes, the rich get richer and the poor get poorer.
Some important strategies for achieving growth with equity are: redistribute first, then grow; redistribution with growth; and basic human needs. Redistribute first, then grow suggests mainly to confiscate from one and assign to another. The affect that this has on income distribution is that it spreads it out to everyone. The people who have a lot will not have as much anymore and those who have none will have some now. This gives everyone an equal opportunity to grow. Redistribution with growth says for the implementation of policies that shape the pattern of development so that low income producers see an increase in earning opportunities and at the same time obtain the resources necessary to take advantage of them. A few ways to achieve this is with more progressive taxation, public provision of consumption goods to the poor, and development of new technologies that aid in the productivity of low income workers. Basic Human Needs strategy aims at providing the poor with several basic needs and services. These services and needs include staple food, water & sanitation, healthcare, primary & nonformal education, and housing. There also has to be proper implementation of this process. First there must be adequate financing to provide these needs and services to the poor at cost. Also certain networks are required to distribute these services in forms appropriate for the poor in their areas.
Basic Human needs – the basic Human needs include food, clothing, housing, education, health, clear drinking water, and sanitation for all.
Market Failures – In a Market failure, the government interferes. There are seven qualities in market failure, which are: monopoly or oligopoly, external economies, external diseconomies, infant industry, under developed institutions, national goals, and macro economic imbalances.
Import substitution strategies – Import substitution is a policy that agrees with export pessimism. The strategy requires government information to safeguard local manufactures, and assume that markets would not work effectively for rapid progress.
Stabilization programs – Stabilization programs are intended to increase inflation and rectify the other disproportions associated with it, notably deficits in the government budget and in the balance of foreign payments.
Consistency and optimality – Consistent enables the person to know what the possible way to solve that method is. Optimal is to get the most out of the method.
Lorenz Curve – Lorenz Curve is a graph that has cumulative percentage of income on its vertical axis and on the horizontal axis is the cumulative percentage of recipients. There is a 45-degree line. The farther the Lorenz Curve bends away from 45-dgree lines greater is the inequality of income distribution.
Structural Change – structural change is a point of interest in efforts to transform cities to enable their sustainable development.
Structural Reform – Increasing economic development in districts can have high impact in output, which enhance the capital stock proportionally to other inputs such as labor. A method of structural reform is Engel’s law.