Define the construct of Gross Domestic Product
Please answer in full sentences. One word answers and incomplete sentences will be penalized. Also, please be sure to write answers of sufficient length where you provide as complete an explanation as possible of what each question asks.
Q1. 13 points
(a). Provide an explanation of the circular flow of income and expenditure. (100words)
(b). Define the construct of Gross Domestic Product (GDP). Does it include all the goods and services produced in an economy? If not, why does it leave out some goods and services? Please answer and explain. (100 words)
(c). Provide a brief explanation of the income and expenditure methods for calculating GDP. Focusing on the expenditure method, provide an equation that lists out the different components of GDP and also explain what these different components include. (100words)
(d). List out and explain three shortcomings of the GDP construct. (100words)
(e). Explain how the output of governments (at all levels) within a country is calculated while calculating the GDP of a country. Analyze whether the inclusion of government output can distort the meaning of GDP numbers. (100words)
Q2. 10 points
(a). Provide an explanation of the aggregate production function that defines the production possibilities that are open to firms in an economy in the short run. (100words)
(b). In the context of the labor market, explain why there is an inverse relationship between the wage rate and the demand for labor, and why there is a positive relationship between the wage rate and the supply of labor. (100words)
(c). In the context of the labor market, explain and differentiate between frictional, structural and cyclical unemployment. Also provide a definition of the natural rate of unemployment. (100words)
Q3. 7 points
(a). What is the good that is traded on the loanable funds market? Explain who is present on the demand and supply side of this market. (100words)
(b). In the context of the loanable funds market, explain why there is an inverse relationship between the interest rate and the demand for investment, and why there is a positive relationship between the interest rate and the supply of savings. (100words)
Q4. 15 points
(a). Money is a universal medium of exchange. Explain. In the process, also differentiate between direct and indirect exchange and explain why the process of indirect exchange is welfare-enhancing and more productive. (100words)
(b). Provide an explanation of the concept of the velocity of circulation of money. Also provide an explanation of the concept of the demand to hold money in cash balances. Explain the relationship between these two ways of analyzing the demand for money. (100words)
(c). Write down the Quantity Equation and provide an explanation of all the variables included in it. (100words)
(d). Use the Quantity Equation to explain the Quantity Theory of Money. Also explain why this theory implies that money is neutral to real GDP and the level of employment in the economy.(100words)
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