Understanding Unemployment, Inflation, And GDP

Definition of an unemployed person

Question 1:

(a) What is the GDP gap?

(b) Explain why comparing the GDP’s of various nations might not tell you which nations people are better off.

What is the “market basket” used by the Australian Bureau of Statistics? Why does the “basket” of goods have to change over time? Give two examples of how the “market basket” has changed over time.

During the periods of economic downturn economists often note that the unemployment rate falls. They attribute this to the “discouraged worker effect”.

(a) Define an “unemployed person”.

(b) What is the “discouraged worker effect”?

(c) Why does this drop in the unemployment rate signal bad news?

(a) Define the term “inflation”.

(b) Inflation has different effects for different groups of people. Who benefits and who loses out from inflation?

(c) It is generally accepted that there are two broad types of inflation, demand-pull inflation and cost-push inflation. Describe both the cause and effect of each.

(a) GDP gap

The gross domestic product indicates dissimilarity between the nations’ actual output and probable GDP of same economy. The gaps associated with GDP assists in indicating the production quantity, which is permanently mislaid by the financial system. The capacity of huge production level is not applied as inadequate jobs were present. Therefore, the gaps associated with GDP points that the financial system is not efficiently operating and sources remain unutilized. So broadly it can be mentioned that the output gap looks for the dissimilarity between what an economies can produce and what it is producing (Zon, 2013). During the phase of monetary decline an economy’s productivity of services and supplies turn down. In good times, on the other hand, the output, which is generally assessed as gross domestic product, increases. Difficulties are present is estimating the GDP gap ad potential output, so policymakers require different other financial indicators to obtain a precise reading about general capacity pressure within the economy. These indicators are: capacity utilization, employment, average working hours, hourly earnings, credit growth, financial growth, labor shortage and inflation compared with expectations. These alternative capacity measures can assist the policymakers to increase their assessment of GDP gap.

(b) Comparing the various nations’ GDP

Simply, GDP assists approximating the economic value of finished products in the nation in a specific time structure. If the GDP of various nations are compared, a thought about financial activities can be determined. Nevertheless, this process does not precisely calculate the living standard of the whole population of a nation, their income level, capacities and their levels of efficiency.  It is said that cost of living could be a factor, where cooling, heating, clothing, health care, automobile usage can be included. Therefore, it is justified to conclude that GDP comparison for different nations, which of the nations having better people are really difficult to recognize. The individual GDPs provide a relative thought of the nations’ success, but mostly depends upon the retained amount within different social classes that might not be in the equal percentage for all the nations (Mehrotra & Pääkkönen, 2011).  Very complicated methods are applied in assessing domestic product and absolute vastness of the job and due to this GDP is essentially a below perfect measure of a country’s economic pulse.

The discouraged worker effect

The market basket and changes in the items of market basket with examples

The Australian Bureau of Statistics applies market basket for approximately calculating the CPI or the consumer price index to estimate households’ inflation in Australia. The Australian Bureau of Statistics believes an easy approach for calculating consumer price index in which the ABS imagines a basket full of goods in addition to the services that is brought by the domestics of Australia. It is supposed that basket is brought in every quarter. Consequently, the total basket price alters and consumer price index approximates the price change of the market basket. 

The products inside the basket changes over time because the requirement for all items are not the same all through the year. The utilization of products differs depend on various season. Tablet computer is added in the increase basket of 2012. Other additions to the basket are teenage fiction for instance Twilight series. Alternatively, candy coated chocolate, jellied sweets, outdoor adventure boot, step ladder, glass ovenware casserole dish are removed from the basket. Charges for printing color film and developing color film are also removed because of the increased popularity of digital camera.

(a) An “unemployed person”

Unemployment takes place when an individual who is energetically looking for service is incapable to get work. Often unemployment is applied as a measure of economical health. The most commonly mentioned unemployment measure is the rate of unemployment (Abs.gov.au, 2015). This measure or numbers of unemployed individuals are divided by number of individuals in the work force.  According to the Australian government, an individual will be marked as unemployed who is 15years of age or more than that and is not in a job during the week. 

(b) “Discouraged worker effect”

This phrase means that individual has surrendered searching for a work because this person believes that no jobs are available for them. As per the Bureau of Labor Statistics, a person who is willing to work and is capable to perform so but has not searched for a profession during past month, as they believe that they cannot find a profession for various reasons, for instance deficiency of need for employees in a particular field or identified discrimination, is considered as discouraged worker. Minorities, recent graduates and older workers are probably to become discouraged workers, stated by the Bureau of Labor Statistics.

(c) Drop in unemployment rate signal bad news

The rate related to unemployment is depressingly associated with the decline in the rate of unemployment, entails that the inflation rate in amplifying. Amplification in inflation rate augments the product prices. Thus, higher inflation level has negative effect on the financial system. So, it can be said that fall in unemployment rate specifies a bad news.

(a) Inflation

Inflation refers to the rate as a result of which general prices for services and products are increasing and consequently procuring power is decreasing.  There is an attempt by the central banks to stop massive inflation, together with severe devaluation, which is considered as an attempt to maintain the extreme increase of costs to a lowest amount. Inflation is also said to be the consistent amplification in the product price and services in a financial system for a specific time period. This can be illustrated simply with an example. Suppose, if the rate of inflation is 2%, at that time a $1 collection of sugar candy will cost $1.02 in that year (Kim & Lin, 2012).  Inflation affects a financial system in various ways, which means both in a positive and negative way. Negative impacts of inflation comprise doubt over upcoming inflation that discourage savings and investment, rise in opportunity cost of invested money and if the inflation rate is quick enough, product shortages as customers start hoarding out of fear that costs will amplify in the near future. Positive consequences comprise making sure that the central banks can regulate the genuine interest rates to alleviate recessions and supporting venture in non-monetary investment projects. Steady and slow inflation rate is always favored. This is because low inflation diminishes the economic recession severity by allowing the work market  to amend more rapidly in a decline and diminishes the threat that liquidity trap stops the monetary policy from economic stabilization. 

(b) The gainers and losers from inflation

Inflation has various effects on dissimilar group if people. It is seen that with an increase I cost, the manufacturers and sellers make higher profit. Moreover it assists in raising the earnings and turns down the redundancy rate. So, precisely, the gainers are the shareholders, businessmen and borrowers or debtors. Businessmen gain profit because of price rise. Shareholders make much bigger profit during price rise therefore higher dividend expense. During the inflation the actual price of money drops, therefore, the borrowers need to give less to the creditors in genuine terms. The losers are the pensioners, fixed salary earners, creditors and savers. For those who are fixed salaried, due to inflation their genuine income will be affected by inflation. If the inflation is rapid the loan will have trimmed down the procuring power. Savers are severely damaged due to inflation as the bank’s authorized supposed interest cannot clash the real interest rate. It creates sensible complications for businesses and individuals in a financial system. This is due to the fact that money is rapidly losing its value; customers should take part in transactions more often as they hurry to spend whatsoever money they have. The rise in transactions generates ‘shoe-leather costs’.  People wear out their shoes faster when price rises is there, due to the increase in the transactions.  In case of higher inflation significant prices are generates as industries pay workers to re-price their goods. Persistent inflation gives rise to inevitable production as employment resources are set to the work of maintaining with increasingly changing prices. 

(c) Demand-pull inflation and cost-push inflation

Demand-pull inflation is stated when the aggregate demand in a financial system exceeds the aggregate supply. In simple terms it is referred as “in excess of money looking for excessively few products” (Zhang, 2012). It illustrates how the inflation takes place. Cost-push inflation shows why price rises once initiated is very complicated to stop. Cost-push inflation principally means that the costs have been driven up by raises in prices of any of the four production factors; these are entrepreneurship, land, capital or labor, when organizations are already working well at complete production capacity. With amplified production costs and augmented productivity, organizations fail to maintain the margins of profit by generating the equal amounts of services and products. Consequently, the raised prices are conveyed to the customers, resulting in a rise in general cost level or what is called as inflation.   


Abs.gov.au,. (2015). 6202.0 – Labour Force, Australia, Dec 2014. Retrieved 23 January 2015.

Kim, D., & Lin, S. (2012). Inflation and Inflation Volatility Revisited. International Finance15(3), 327-345. doi:10.1111/j.1468-2362.2013.12001.x

Mehrotra, A., & Pääkkönen, J. (2011). Comparing China’s GDP statistics with coincident indicators.Journal Of Comparative Economics39(3), 406-411. doi:10.1016/j.jce.2011.03.003

Zhang, X. (2012). China’s Inflation: Demand-Pull or Cost-Push? ∗. Asian Economic Papers11(3), 92-106. doi:10.1162/asep_a_00169

Zon, N. (2013). Filling the gap. Toronto, Ont.: Mowat Centre.

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