Economic Questions V

467 thoughts on “Economic Questions V”

1. Hi Julie
   Large government fiscal does not cause a large trade deficit. Trade deficits are different from it and causes of trade deficit are also different. Even government fiscal deficit do not contribute in current account of a country directly . Yes if government manages money from outside to fund its deficit, then it may increase current account deficit of a country. Japan has big government fiscal deficit, but has huge trade surplus.

2. sorry upon was for isadora

3. Hello Julie

   Real GDP is different from Nominal GDP. In calculating real GDP we have to take care of inflation or deflation. Some time real gdp does not rise but nominal gdp rises. Real GDP is based on purchasing power parity. In most cases real gdp remains less than nominal gdp because of inflation. Actually real GDP is better measurement for watching economics progress. Government ‘s spending may increase inflation, but this would not effect at the time of measurement of Real GDP.

4. Hi Derek
   Investing in cash surely makes a negative effect on rising interest rates. It is very simple. With the more supply of cash , demand will decrease & interest rates would go low. People in a country use their saving in may ways like share market, Real Estate, depositing into banks etc. If more people would deposit their money into banks and other institute on interest, naturally supply would increase and interest rates would decrease.It may decrease funds for industry and business specially in those sectors where investment is more risky. It may slow GDP growth (but not always).

5. Hi, i have always had a mathematical and ponderous mind and consequently i have a weird feeling that the marshall lerner condition doesn’t work. It is defined as the SUM of elasticities for imports and exports to be above 1. But that means that 2 inelastic demands, of say 0.6 and 0.6 apparently lead to an improvement of the trade balance after a devaluation.
   Intuition tells me that, since both are inelastic, then despite a fall in price exports wont increase proportionately and despite an increase in price imports wont increase. This should also worsen the current account.
   Also consider for following example:
   if we need the sum to be above 1 for improvement, then, by that logic, a sum of exactly 1 should lead to no net change.
   initial exchange rate: £1:$2
   we export 1000 £100 ($200) computers for £10,000 (£20,000) revenue
   and we import 1000 £100 (£200) computers for £10,000 ($20,000) revenue
   PED for both imports and exports is 0.5 (summing to exactly 1)
   then, a depreciation leads to an exchange rate of £1:$1
   for exports, this is a depreciation of 50% therefore demand increases by 25%.
   so we sell 1250 £100 ($100) computers for £12500 ($12500) revenue
   now for imports: it is effectively a 100% increase in price so the decrease in demand will be 50%
   so now we buy 500 £200 ($200) computers for £10,000 ($10,000) revenue.
   ok, so this is against what i said earlier in that the balance of trade has improved.
   but why has it not stayed the same?
   and why, by this measure, have export revenues increased despite being inelastic in demand?
   and finally, why has imports not changed at all in terms of revenue?
   i was thinking, is unit elasticity (ped of 1) really what i thought it was. because if you decrease price by 50% and demand increases by 50% then overall revenue has fallen by 25% and not stayed the same as most econ books seem to suggest it would.
   aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaah!
   so sorry about how long this is, i really am.

6. Hello callum

   You have good understating of economics & Math. We assumed our country England. 1sterling = $2 . England exports 100computers @100pound per computer for total 10000pounds($2000dollars). Now value of sterling changed. 1pound =$1(EOD=.5)
   Now 1 computer will be available exactly for $100. This is 50% change in price. So demand would be 100+(50%of100*.5) i.e. 125computers and total export=125*100total 12500

   Now imports —- We import 100computers @100pound total 10000pound.
   Now 1sterling=$1 . Now cost of 1computer =200pound. This is 100% change in price.
   Now total import would be 100-(100%of 100*.5) =50 computers. Total import=50*200 total 1000pound.
   Total export goes to 12500pounds & import remains at 10000pounds. This is increase in balance of trade for England. So Marshall and Lerner law is being applied here. Balance of Trade for England has been improved.

   Both case are related with relatively elastic demand because percentage change in demanded quantity is less then the percentage change in price. Unit elastic demand is when% change in demand is equal to % change in price. So both cases are not related to unit elastic demand.

   Actualy Marshal Lerner law simply tells that devaluation of currency would encourage balance of trade for particular country. It is an application of simple law of demand.
   Although practically goods may inelastic in short run and devaluation practically may not always increase balance of trade in short run.

7. explain the effect of change in population on the labour force?

8. If investment increases output,output should increase investment?Discuss…
   Fanks in advance…

9. Hello mutinaba

   Labor force means employed and unemployed labor of a particular country.
   In general case specially developing countries high population growth increases
   unemployment . Employment mainly depends on demand. There are two types of demand. 1)internal demand2) external demand. Internal demand is demand of production in country. External demand is demand of production in external countries. Increasing population can create internal demand but external demand is independent from country ‘s own population. So this may reduce employment rate. But practically, this does not always happen. Employment also depends on productive resources. But these resources may not increase with population. So there may be more unemployment as result of population growth. In case of population structure, if non labor population (like elders, children etc) has good percentage in total population this may enhance employment because there non labor population would only create demand and not participate in labor supply.

10. Hi Marg

    Investment increases output. Investment is cause and output is effect. In long run
    output depends on investment and investment depends on demand. Yes at some level
    output itself may create demand . This is reason why output is increasing rapidly in China and India but not in America or England.

11. The CPI for all items was 202.9 in June 2006 and 194.5 in June 2005. The CPI for all items less energy was 203.6 in June 2006 and 198.5 in June 2005. Calculate and interpret the inflation rate based on these two measures.

    All items – 4.3% inflation
    Ex Energy – 2.6%.

    Answer – the inflation rate for goods excluding energy was less than the inflation rate for all items over this 12 month period. This means energy prices must have been increasing faster than the over all price.

    Please explain whey energy prices have been increasing faster than the overall price.

12. Hello Chris

    It is very simple. Energy Is most important economic concern if our time.
    Energy specially crude oil and gas is most important commodity at this time.
    Oil, gas and coal reserves are very limited and demand is growing regularly.
    Energy has double effect on economy. First it is used for personal consumption. Second most critically it is also an input for production. In 1996 price of crude oil was just near $20.Even market price of oil today is much undervalued. Its natural price should be much higher. Oil reserves are decreasing. No one can produce oil. It is gift of nature.
    Nuclear energy is believed to be an alternative to oil but you have seen circumstances of JAPAN. From agriculture to industry every thing depends on energy which is mostly generated through non renewable resources. In July 2008 oil price rose to $140 and theoretically it should go up with time because oil reserves decreased from that time and demand is increasing. Oil price would go much high from there. Demand of oil is projected to increase 40% by 2030. From where would we get oil. Modern economy depends highly on oil. Demand of crude oil is increasing.

13. Thanks Raj,
    but i am still confused. Given the numbers I provided how can i tell that energy prices are rising faster than inflation. For example, if it were ex-zebras instead of ex-energy, how can i tell if zebra prices are rising faster than prices on a whole. I do not understand the math behind it. Any information would be greatly appreciated.

14. Economic quastion need answer please if you now only i cant figher out how to solve this?
    suppose the following table reflect the total satisfaction derived from consumption of pizza slices and pepsis. assume the pissa cost $1 per slice and a large papsi cost $2. with $20 to speen, what consumpation mix will maximize satisfaction ?

    quantity consumed 1 2 3 4 5 6 7 8 9 10 11 12 13 14

    tottal units pleasure
    from pizza slices 47 92 132 166 196 224 251 271 288 302 212 215 312 300

    total units of pleaser
    from pipsi 111 200 272 336 386 426 452 456 444 408 340 217 92 -17

15. why do we witness the failure of economic policies over time and how can we resolve this

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