November –December 2012
Chapter 15, Question 14
According to Ott (2008), “National income is the total market value of production in a country’s economy during a year. It can be measured alternatively and equivalently in three ways: The value of expenditures, the value of inputs used in production and the sum of value added at each level of production” It is a system employed to account for and document economic changes.
A national income account system is employed to account for and record economic changes. Investopedia (2012) stated that it provides economists and statisticians with detailed information that can be used to track the health of an economy and to forecast future growth and development. Although national income accounting is not an exact science, it provides useful insight into how well an economy is functioning, and where monies are being generated and spent. The following are some of the metrics calculated by using national income accounting include gross domestic product (GDP), gross national product (GNP) and gross national income (GNI).
Ott (2008) found that using these “Statistics as an indicator of standard of living can be erroneous as the result of multiple inaccuracies or conclusions drawing from the data”. Therefore, as indicated in Econport (2006) handbook the following are the limitations of the national income accounts: * Errors in Measurement: Black Market and underground activities are not included when calculating GDP. This is because there is no way to accurately measure black market activity. In the United States, this is a relatively small percentage of the total GDP; however, in many other less developed countries, it can go as high as 70% of the country's total GDP. Another big measurement error is inflation. It is adjusted according to base prices and various other things and the range of possible inflation can be as much as 1% to 15% in some places. * Subcategories that are misrepresented: The various interpretations of what should be included in consumption or government spending plays a big part in the overall determination of GDP. Decisions are made about what is to be included where, but minor discrepancies will always arise. * Welfare is NOT Measured: GDP only measures the market activity and does not take welfare into account. The economic activity of a country could rise, while welfare could possibly have fallen. Different situations may occur that have a negative impact on the people which cause them to increase spending, therefore increasing the GDP.
Some other unrecorded items missing from the calculations such as: Non-marketed items (e.g. services from person to person, babysitting), Problems in using National Income statistics to measure welfare, Production not equally consumption, high costs of production costs and benefits to external production etc.
Chapter 16, Question 5
Nayab (2010) defines “Frictional unemployment is the short-term unemployment of people who are changing jobs, careers, or locations. This category of unemployment includes the jobless who have the skills and competencies to land a job, and are in the process of finding a job, but have not landed a job yet”.
She stated that this type of unemployment exists because of the mismatch between the characteristics of supply and demand in the job market. The characteristics of mismatch include skills, payment, work timing, location, attitudes, tastes, and other factors. In this sense frictional unemployment closely resembles structural unemployment where a surplus of a particular skill set or type of employee arises, with not all such individuals able to find work, such as what happened when many highly skilled technology professionals remained unemployed after the tech bubble of the 1990s.
Nayab (2010) found that: Many economists consider frictional unemployment a sign of economic well-being, for this type of unemployment only exists in a fast-growing economy with an…