3 GDP UNEMPLOYMENT and FISCAL POLICY 16 marks a Define and b

3. GDP, UNEMPLOYMENT and FISCAL POLICY [16 marks]

a. Define and briefly explain how GDP is measured. [3 marks]

b. Describe and give examples of two (2) specific shortcomings of GDP as a measure of economic wellbeing. [4 marks]

c. Explain how unemployment is measured and outline a problem with measuring the unemployment rate. [3 marks]

d. Use the AD/AS model to show an economy in recession. Explain how fiscal policy can be used to move the economy back to the long run, full employment level. [6 marks]

Solution

ANSWER-1) GDP can be determined in three ways, and all as per the principle should gives the same result

1. The expenditures approach

As per expenditure approach, GDP= investment + consumption + government expenditure + exports - imports.

2. Income Approach

As per income approach GDP is sums the factor incomes to the factors of production.

3. Production Approach

The Production Approach is also known as the value added approach. It computes GDP as the difference between value of output minus the value of goods and services used in producing these outputs during a financial period.

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ANSWER-2)

1) GDP does not differentiate among more or less productive economic activity. GDP implicitly makes an assumption that economic activity is the desirable ends rather than a means to an end. For example: Although people are working fewer hours however are more productive due to innovations and new technology. Thus the difference in the length of work weeks does not matter

2) GDP does not count non-market production activities and all of the production in terms of legal and illegal which falls in the underground economy. For example: black-market activities, illegal buying and selling of stolen goods, barter, drugs, and unpaid work