Business Economics ECON545 Summer 2014

Exercise 1. Chapter 15 Question 14

The National Income and Product Accounts (NIPA) let economists judge our nations economic performance, compare American income and output to that of other nations, and track the economys condition over the course of the business cycle. The NIPA allow us to track business cycles, compare the domestic economy with that of other nations, and take a crude measure of our standard of living (Stone, 2008). But we must keep in mind that an aggregate measure of the economy cannot be all things to all people. As we add complexity to an already complex undertaking, the NIPA may lose some of their effectiveness as a measure of economic activity. GDP is one of the most common measurements economists look at (Macroeconomics). Therefore, there are some limitations to national income accounting. First of all, there could be many 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 (Macroeconomics). 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. Changes is quality are not measured. Higher quality or new products often replace older products. Many products, such as cars and medical devices, are of higher quality and offer better features than what was available previously. Finally, GDP does not account for harmful side effects, such as pollution. All transactions that do not get recorded are also not taken into consideration when calculating GDP or any other alternative income measurement system (Stone, 2008). Exercise 2. Chapter 16 Question 5

Frictional unemployment is natural for our economy and, indeed, necessary and beneficial. People need time to search for new jobs, and employers need time to interview and evaluate potential new employees. (Stone, 2008) The presumption underlying frictional unemployment is that a suitable job exists for each unemployed worker. The employer and worker either do not know about the other, or if they do know, they are located in different parts of the country. The "friction" of frictional unemployment is the cost involved in searching or relocating (Amadeo, 2012). Therefore, a rise in frictional unemployment is actually important beneficial aspect of a normal functioning economy. It simply indicates an increase of workers moving towards better positions. Even if workers leave due to firings or company-specific layoffs, it means they were out of sync with their positions or managers, or that they are leaving uncompetitive companies or industries. In any case, they will win positions that are better for them as a result. Frictional unemployment is actually a benefit for the economy. It allows companies the opportunity to find qualified workers. If there were no unemployment, if everyone stayed in their jobs until they found a new one, it would be more difficult, time-consuming and expensive for companies to bring on good workers. Labor costs would rise, creating cost-push inflation. On the other hand, worker pay would rise, possibly helping to reduce income inequality in the U.S (Frictional unemployment). We can conclude that eliminating frictional unemployment would be unwise and impossible as it must have its natural levels. However, the efficiency of human resources services and information search can be improved in order for employers and employees to find each other faster and with the least costs.

Exercise 3 Chapter 16 Question 6 Frequently hyperinflation is caused due to a Central Bank's decision to increase its money supply to finance its nations over-extended government debt and spending. Consequently there is a decrease for the demand on the nation's money relative to the money supply that in severe cases will cause a total loss of confidence in the money. This transforms into a swift increase in the rate of spending causing rapid increases in prices (Genot, 2012). Growing up in Russia in early 1990s I remember people losing all their savings overnight as inflation and investing what they could in foreign currency, gold, silver, and various household items. As hyperinflation takes over an economy its devastating effects usually will wipeout the purchasing power of all public and private savings which in turn distorts economies to support hording of real assets and extreme consumption forcing the monetary base of hard currency to quickly exit the country effectively turning the affected country into a wasteland for future investments. Therefore, the uncertainty it creates can halt all business planning as no business can function not knowing what to expect of economic climate short term and long term(Genot, 2012). Combatting hyperinflation is not an easy task. Complex measures must be taken to stop hyperinflation. New monetary policies must be implemented. Monetary policy is the set of economic tools used by governments to adjust interest rates and control the amount of money in circulation. Government needs to balance budget, as it eliminates one of the causes for hyperinflation. In other words, if they reduce the amount of money they use to pay for all the services, it will help to bring down inflation rate. Government also needs to stabilize the

exchange rate to restore public confidence in the financial system and end hyperinflation (Blissett).

References

Macroeconomics - limitations of gdp and alternative measures. (n.d.). Retrieved from http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/limitations-gdpalternative.asp Frictional unemployment. (n.d.). Retrieved from http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=frictional unemployment Amadeo, K. (2012, June 09). Frictional unemployment. Retrieved from http://useconomy.about.com/od/Employment/p/Frictional-Unemployment.htm Genot, T. (2012, February 05). Hyperinflation - its causes and affects. Retrieved from http://ezinearticles.com/?Hyperinflation---Its-Causes-and-Affects&id=6861879 Blissett, L. (n.d.). How to fight hyperinflation. Retrieved from http://www.ehow.com/how_8547203_fight-hyperinflation.html Stone, G. (2008). Core economics. (2e ed.). New York, NY: Worth Publishers.