|Date published:||18 Sep 2018|
When an economy increases its ability and the capacity to produce goods and services, it is said to be growing. Economic growth is the ability of an economy to raise the output regarding goods and services. It is determined when the comparison is made between different periods of time. Its measurement is regarding nominal or real terms with the latter referring to inflation. Combined economic growth is conventionally measured regarding GNP (Gross National Product). However, this is not the only measure of economic growth. Sometimes, alternative metrics are used. Market dynamics refer to the valuing indications molded from the changes in the supply and demand levels in a particular market. It is involved in the description of the price changes that are as result of the continuous changes in the demand and the supply of a particular product or an aggregate of goods.
Breakdown of market dynamics
A change in either supply or demand of particular product results to a change in the other which has an impact on price signals. The determinant of the price of a good or service is the market. This is particularly when there is no single entity which has an influence on the market. Changes in the market are attempted to be explained using the economic model by making use of the available relevant variables. However, it is not all the variables that can be quantified. A different sort of market changes is created by human emotions in a financial market. This is due to the existence of professionals in who are known to make rational decisions versus the existence of other market participants with little knowledge about the market.
Breakdown of Economic Growth
The rise in aggregate productivity which is also known as economic growth correlates with the increase in marginal productivity. It brings about a case where an average worker in a given economy on average raises his productivity. Sometimes, economic growth is possible without the individual rise in the marginal productivity via the increase of birth rates as well as increased immigration into a free economy. For an economy to be said to be growing, it tends to provide more goods and service than before. However, the measure of growth should be regarding quality and not just quantity. This because despite the increased production, some commodities are more valuable than the others. For example, computers are more expensive than pillow cases.
Economic growth deals with numerous problems with the first one being the subjective nature of the value of products. This means that different individuals place different value on different products. For example, a heater is more valuable to the people living in the tundra and arctic regions than those in the equatorial regions. The best measure is, therefore, the current market value. For example in the United Kingdom, it’s measured regarding sterling pounds. A higher aggregate produced market value is considered much more valuable. Higher economic growth is also associated with a better quality of life and the standards of living.
Economic growth is generated in a few ways. This can be through the discovery of better economic resources. For example, the discovery of crude oil before its ability to produce power which means that the resource can be translated to a cheap source of power for the countries’ firms. It can also be through the generation of more skilled labor which is translated to higher productivity. Another way to generate economic growth is through the discovery of better technology. In a nutshell, the rate of mechanical development depends on the degree of savings and investment since they are necessary for venturing into research and development. The last method of generation of economic growth is through increased specialization. Workers incline more towards their areas of expertise which is translated to increased productivity.
GDP and how it is measured
The value of economic activity within a nation is measured using the GDP. It also refers to the total value or the prices of the final products (goods and services) produced within an economy within a specified period. GDP, however, has three critical definitions with notable distinctions. Firstly, the expression of the worth of a country in the local currency is a definition of GDP. Secondly, it tries to capture the final products of a particular country as long as they are produced within the borders of the same state. This ensures that the sum of the total value of the products is represented within the GDP. Third, gross domestic products are calculated within a specified duration which may be annual, quarterly among others.
Computation of GDP
Calculation of GDP can be hectic since it relies on the total monetary value of all goods within an economy. Acquiring these values for specific product require strict exploration of the market for a specified period. This brings about a critical output that is equally important when broken down to large constituent values. A standard set of classes is utilized by the macro economists to break down the economy into its constituents. This creates an instance where GDP is calculated as the sum of the consumers’ expenditure, investment, government buying and net exports as shown in the equation.
Y = C + I + G + NX
In the equation, every section of the state economy is captured by Y. the value also represents GDP as well as the income of the state. This occurs because the change of ownership of money from one person to another represents expenditure for one party and income for the other party. Since all these values are captured and represented by Y, it is then said to represent the net economy (the entire economy)
Validity of using GDP as a measure of economic output
The unusual expansion of the economy for the last 50 years was a success in term of GDP where the general economy of the world has grown for around six times and the per capita income on average has tripled. But what about the impact on the ecology due to sustained high economic growth? What about the concern for growth in the developed world about the festering media earnings and widening disparity?
There is almost a global agreement that growth and prosperity cannot be correctly measured using GDP. GDP may be anachronistic and misleading. It may fail entirely to capture the complex trade- offs between present and future, work and leisure, ‘good growth’ and ‘bad growth.’ It’s great virtue, however, remains that it is a single, concrete number. For the time being, we may be stuck with it.” As stated in the financial times.
GDP has not even kept pace with the dynamic nature of economic activities. The design of GDP is in measuring the physical production of commodities and services in the market economy; it is not well suited to account for the private and the public sector services that have no products that can easily be measured with ease by counting some components produced. It’s also not involved in the assessment of improvements regarding the quality and the diversity of goods and services or the estimation of environmental degradation and resources depletion as a result of the production process. Also, transformative dynamics in tech is not easily evaluated using GDP because the consumers enjoy much of the benefit. Therefore, as GDP is used in the definition of the report, there should be an improvement of the GDP accounts which helps in the definition of new metrics of importance which would create a more firm image of well-being.
How the consumer price index and GDP work together to measure price index changes from year to year
GDP is a representation of the total value of all the goods and services that are produced within a specific duration. The consumer price index measures represent the goods and services that people are buying which are annotated as a theoretical basket of goods and services. All these goods that the people buy are then averaged and weighed against each other depending on their importance to the households. CPI is an indication of what the economy is experiencing in terms of deflation, inflation, or stagflation. CPI and GDP thus have a close relationship though a few differences exist between them. The constant rise in the prices of certain goods is referred to as inflation. It is calculated using the CPI. Central CPI is used by most economists as a measure of inflation because food stuff is excluded since they have a more unstable valuation. Most people are always in need of economic growth but not fast growth. If there is a too fast growth, then inflation grows at the same speed which is translated to a high cost of living as reported through CPI. This makes it hard for people to cope up with. It is then hard for the people to afford the new prices of the goods because the rate at which the people receive their income and the rate at which the income increases is slower than inflation. The rise in CPI is translated to a rise in wages because CPI is used in income adjustment. These adjustments in taxes, retirement benefits, and wages are done by the BLS. The government is, however, slower than the markets. Then if the growth of GDP is rapid, it is difficult for the government to make all the necessary adjustments essential for the citizens to have a good life due to the rapid rise in the cost of living. Both GDP and CPI are very crucial in the economy and tend to affect each other. The negative impact of GDP and CPI on each other can only be avoided through study flow of the economy.
Importance of business cycle relating to labor market and economic activity
The changes in unemployment can be analyzed using Lucas and Rapping’s theory of intertemporal substitution in the supply of labor. The real Keynesian model and the actual business model can also be analyzed via the use of the same theory. The main assumption is that laborers make a decision regarding how much they will work at every juncture and taking the wages as given at that time. The time that work is done keeps on changing as payments move creating an extent that the supply of labor becomes elastic.
The business cycle is of importance to both the employer and the unemployed. The employers determine the best time to employ more workers and also recruitment. In the business recession, when the rate of unemployment goes up, there is a decrease on the side of the market. When the market is down, the employer does not create the entrance rate of employment to maintain the maximum profit in the market.
The unemployment and job seeking rates affect the wages paid to the workers. When the business and the profits of the firms get back to normal, there is the creation of job vacancies. This leads to decrease in the unemployment, and hence it becomes hard to find workers. Due to low supply of the employees in the market, the unemployed can bargain the wage to be more than when the unemployment is high. On the side of the workers who do not match wishes that the wages should be lowered so that the job creation could increase.
Formula for a key labor market indicator
Key labor market indicator that is used to measure the labor force participation is given by the formula below.
RL = CL/CP
Where RL is the rate labor force participation, CL is the number of the people in the civilian labor force and CP is the total population of the civilian who are from 16 years old and above. This indicator can be broken down into groups depending on the age and the rate is given in percentage of each group.