Macro-Economic Indicators: GDP, CPI, Unemployment, and Interest.
Introduction
Gross Domestic Product (GDP) represents the total worth or total value of all the goods and services over a specified period of time or the size of an economy. It’s calculated as a comparison to the past quarter or year. It can be calculated in two ways i.e. the income approach or the expenditure approach.
1(a).Assume that the consumer spending is $1000, government expenditures are $250, investments by industry are $200, and the excess of exports over imports is $300. Compute the GDP.
Y = C + I + E + G = 1000 + 250 + 200 + 300 = 1750, GDP = 1750.
Y = GDP, C = Consumer spending, I = Investment made industry, E = Excess of Exports over Imports, G = Government spending.
2(b).If we are able to increase our domestic energy production, and that allows us to import less oil from foreign countries, briefly explain what will happen to the GDP.
If we are importing less oil from foreign countries then the excess of exports and imports will increase positively which will result in a positive growth for the economy. For instance, in the above problem if the imports were reduced by $100 dollars then the GDP will also increase by $100 to $1850.
1(c).If the CPI went from 106 to 111 during the past year, the rate of inflation, in percent, was?
Inflation is the average rate at which the prices of all goods and services are increasing and the negative impact on purchasing power. To calculate the inflation rate, we simply work out the differences between the two consumer price indexes i.e. the previous year’s CPI from the current year’s CPI and multiply the difference by 100 to get a percentage. The rate of inflation = 111 – 106 = 5/106*100 = 4.7%
2(c).If the CPI went from 217 to 234 over the past year, the rate of inflation was?
The inflation rate = 234 – 217 = 17/234 * 100 = 7.265 %
1(d).Assume the total civilian labor force is 30,000 people and the number of unemployment is 2,500 people. Compute the unemployment rate, in percentage.
Unemployment rate = number of people unemployed/number of people in the civilian labor force. Unemployment rate = 2500/30000 * 100 = 8.333 %
2(d).As with the above problem, assume the total civilian force is 30000 people, but, 500 of the unemployed have now given up and have stopped looking for work. Compute the unemployment rate, in percentage.
An unemployed person in the US is a person who belongs to the civilian labor force who is willing and available for any chances of employment in his line of profession or liking, has worked for wages of less than an hour per week and is actively involved in searching for employment.
Unemployment rate = number of people unemployed/number of people in the civilian labor force. Unemployment rate = 2500 – 500/30000 -500 * 100 = 2000/29500 * 100 = 6.78%.
1(d).The differences in rates among the above treasury bonds is caused by down sloping yield curve. They usually don’t follow the federal funds rate instead they follow the yields between the 10-30 year Treasury Notes, which are auctioned to the highest by the US. Treasury department. The yields normally respond to the markets needs or demand, if the demand is high, the yields are low and if the demand is low then the yields will be high to attract clients or investors.
Which statement is false?
2(d).The default risk premium is applied to all bonds including US government ones. It’s false because in the United States, the only borrower who does not pay the default premium is the US government. However during hard economic times the US government offer higher yields to attract investors. The default premium is paid by corporations or companies with low grade bonds or individuals with poor credit rating.
3).Over the next 3 years inflation is expected to be: Year one 2.5%, year two 4.5% and year three 5%. What should investors require for an inflation premium on a treasury bond with a three- year maturity? The inflation premium is the provision for expected effects of inflation expected by the investor given the prevailing economic conditions. The three year maturity bond should have a margin of at least 5% inflation provision to cater for the erosion of the expected returns on the investment due to the negative effects it has on the expected income.
If the rate of inflation is expected to be 0% for the next 4 years will the yield curve have an upward slope? No. A higher inflation increases bond yields while a low inflation decreases the bond yield. In this case it will definitely not increase, but it maybe constant or decrease.
Compare the four countries in terms of output and growth (real GDP). The analysis should only cover the period of 2008 to the present.
In the first quarter of 2008, United Kingdom had the highest GDP at2.9%, followed by Canada at 1.9%, USA at 1.8% and finally Japan at 1.5% respectively. During the same period in 2009 Canada was leading with a negative growth of 3% followed by USA at 3.8%, while UK and Japan were at par at negative 5% growth rate. The GDP of all these nations shrunk between the first quarter of 2008 till the first quarter of 2009 when some of the country’s GDP started improving. Japan experienced the highest growth rate in 2010 at 5.9% followed by Canada at 3.8% whiles the US and UK had an average positive GDP growth rate at 2.6%. All the countries experienced a decline in their GDP performance in the year 2011 while they increased slightly in 2012 followed by a slump in the first quarter of 2013.
Compare the four countries regarding the labor Market (Unemployment Rate). The analysis should cover the period beginning of 2008 to the present.
In 2008 the unemployment rate in Japan was constant at 4% till the middle of 2009 when it registered a positive growth of 1.4% to 5.4%. From that time till the end of 2012, Japan experienced a constant declining rate of unemployment till 4.2% with slight fluctuations. While Canada for the similar period i.e. 2008 experienced a constant growth of 6% then increasing to 8.5% in mid 2009 then declining constantly with slight fluctuations to 7.3% in 2012. United Kingdom had an unemployment rate of 5.2% in the first quarter of 2008 and later rising constantly to 7.8% in the third quarter of 2009. It remained relatively constant with slight fluctuations at 7.8% till the second quarter of the year 2011 where it rose to 8.4% in the first quarter of 2012 then it took a declining trend to 7.9% in the second quarter of 2012. United States of America unemployment rate stood at 5% in the year 2008 rising to 10% at the end of 2009 and registering a constant declining trend with slight fluctuations to 7.9% at the end of the year 2012.
Compare the four countries with respect to inflation and prices (CPI). The analysis should cover the period beginning of 2008 to the present.
In the first quarter of 2008, all the four countries registered an increase in CPI, with the US leading the pack at 5.2%, followed by UK at 4.9%, Canada at 3.5% and finally Japan at 2.1%. These trends show the rate of inflation with countries experiencing low rates of CPI being considered to be doing well economically. From the first quarter of 2008 till the end of the second quarter in 2009, all the four countries experienced a sharp drop in their CPI ratings with Japan being the least with a negative growth rate of 2.2% followed by USA at negative rate of 1.9%, Canada at negative 0.9%, and UK at a positive growth rate of 1.9%. From mid 2009 to mid 2012, all the four countries had a positive growth with slight fluctuations. From mid 2012 till present the trend is declining for all the countries with Japan at a constant zero growth rate being the least and showing the best trend from mid 2009.
Provide a conclusion, with supporting justification, as to which country has the best overall economic recovery since 2008.
According to the consumer price index (CPI) Japan seems to have a constantly low CPI rate compared with the other four countries. With an average of zero growth rate from mid 2009 to almost end of 2012, the CPI shows how low the inflation rate is in Japan. Out of the four countries, Japan had the lowest growth rate of 4% at the beginning of 2008 and generally maintained the lowest levels of unemployment throughout the years till end of 2012. While all countries experienced declining GDPs till the end of 2009, Japan registered the highest growth rate at 5.9% in 2010 and maintaining it. For these reasons then out of the four countries, Japan is doing much better than the rest.
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