Macro Econ

ECON3701

ECON3701

Macroeconomics

Question 2

GDP DATA- GOOD OR BAD

GDP measures the output of goods and services produced by labor and property in a country during a given time. GDP has become the metric economists and policymakers primarily look to for analyzing the health of our economy and setting economic policy. However, GDP is a measure of raw economic activity, not a complete picture of economic progress.

The calculation which can be done using different methods, gives the monetary value of all the goods and services purchased within national borders by persons, businesses, governments and foreigners. As a raw data analysis, GDP gives a good broad overview of the market economic activity that takes place within a country, however, because it does not differentiate between types of spending, and because it does not recognize non-market forms of production and values without market prices, GDP does not provide a complete picture of economic and societal progress.

For example, one of the methods of determining GDP counts just broad categories of consumption, investment, and government spending. It cannot distinguish between “good” and “bad” spending. If government spending increases due to responding to a natural disaster, or if it increases due to a substantial infrastructure expansion program, there is no distinction in GDP accounting. Yet, the infrastructure program is clearly better for our overall economy and society. Likewise, if personal consumption increases, GDP counts that as a positive sign, even if the personal consumption is financed by credit cards or other means that put households in debt. Despite it being a broad measure, there are several things that GDP does not measure that are essential for both the economy and society. Most glaringly, GDP does not capture the distribution of growth and, as a result, cannot reflect inequality. GDP also does not capture the value added by volunteer work and does not capture the value of caring for one’s own children. For example, if a family hires someone for childcare, that counts in GDP accounting. If a parent stays home to care for their child, however, the value is not counted in GDP. In addition, the enormous value of the country’s natural capital and ecosystems is also not reflected in GDP. Preserving the country’s natural resources—essential to our current and future wealth—is not counted but exploiting them in an unsustainable manner is. only when natural resources are sold or somehow commoditized do they show up in GDP calculations.

Required

A. Explain the term GDP. (2 marks)

B. Assess the evidence presented in the case and discuss the TWO (2) uses and TWO (2) limitations of using GDP data to measure the well- being of a nation. (8 marks)

C. One of the methods used to calculate GDP is highlighted in the case.

i. Name the method (1 mark)

ii. Explain using examples THREE (3) elements that are important when using this

method to calculate GDP (6 marks)

D. A country’s real GDP is substantially higher today than it was 60 years ago. What does this tell us about the well-being of that country’s residents? (3 marks)

(Total 20 marks)

Question 3

Bank of Jamaica’s monetary policy objective is to achieve and maintain inflation within the target of 4.0 per cent to 6.0 per cent. Several tools can be used to achieve inflation within the target is through the bank’s policy interest rate.

A. Identify TWO (2) types of monetary policy tools that can be used by the Bank of Jamaica

to achieve its monetary policy objectives.	(10 marks)
B. Why is it important to control the supply of money in the economy?	(4 marks)
C. Describe TWO (2) motives that influence the demand for money?	(6 marks)

(Total 20 marks)

END OF ASSESSMENT

21/05 The Council of Community Colleges of Jamaica Page 1

21/05 The Council of Community Colleges of Jamaica Page 1