Production is proportional to the stock of machinery. Growth Rate of GDP We want to determine the growth rate of GDP, which is defined as: G(Y) = (change in Y) / Y where Y = GDP To do this, we estimate the Incremental Capital-Output Ratio (ICOR), which is a measure of capital efficiency. ICOR = (change in K) / (change in Y) where K = capital stock A high ICOR implies a high increase in capital stock relative to the increase in GDP. Thus, the higher the ICOR, the lower the productivity of capital. Since capital is assumed to be the only binding production constraint, investment (I) in the Harrod-Domar model is defined as the growth in capital stock.
Is GDP a good enough indicator of understanding the economy? How GDP contributes to growth and development of a nation? What is GDP? The gross domestic product (GDP) is an aggregate measure of total economic production for a country and represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (adding exports and subtracting imports). Gross domestic product, adjusted for inflation, also known as "real GDP", can tell economists whether an economy is growing or contracting from year to year or from quarter to quarter, a key determinant in deciphering whether the economy is expanding or in a recession.
Economics Using a diagram explain how the government can use fiscal policy to alter the level of A.D (aggregate demand) in the economy? * Aggregate demand is the total spending on goods and services in a given time period. Aggregate demand curve has the total quantity of all goods and services and average price levels for all goods and services. The aggregate demand curve shows the relationship between Average Price Levels and Real Output. The Components for Aggregate Demand are C (consumption)+ I (income)+ G (government spending)+ (X-M) (net exports) and a change in the components of Aggregate demand will cause a shift of the curve.
Monetary Policy in Automotive Industry The Effects of Inflation on the Automotive Industry In the United States, the economy is what drives the lifestyle of the people who live. There are two extremes, inflation and a recession. “Inflation can be defined as the overall general upward price movement of goods and services in an economy” (Bureau of Labor Statistics, March 1, 2012). A recession can be described as a general slowdown in the activity of the economy. According to Brue (2010), monetary policy is defined as a central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth.
Whereas, the capital output ratio ‘K’ is negatively related to the growth rate. Since the capital output ratio is fixed in the assumptions, this model focuses mainly on the saving rate as only one factor in raising the growth rate. “The higher the level of saving and investment, the higher level of growth” became the conclusion. The Harrod-Domar Equation states that the rate of GDP is determined jointly by the national savings ratio (S) and the national capital output ratio (K) Therefore: 1) The growth rate of national income is directly (positively) related to the savings ratio, i.e., the more an economy is able to save – and therefore invest – out of a given GDP, the greater will be the growth of that GDP. 2) The growth rate of national income is indirectly (negatively) related to the economy’s capital-output ratio, i.e., the higher is k, the lower will be the rate of GDP growth.
(4 marks) c) Setting MRS=MRT, solve the resulting equation algebraically for l as a function of G. (6 marks) d) What happens to consumption, wages and output as G increases? (6 marks) Question 2: Now consider the same representative agent, but subject to a proportional tax, so that the budget constraint is now C = (1 − t) z (1 − l) where t is the tax on wages. Assume z=1. a) Solve for labour supply as a function of t. (6 marks) b) Now assume that there is a target level of government spending, with a balanced budget: G = tz(1 − l) What is the value of t that maximizes tax revenue G? (6 marks) 1 City University London Intermediate Macroeconomics 1 Joe Pearlman c) Sketch the Laffer curve for values of t from 0 to 1.
| | | the per-worker production function shifts to the left. | | | the per-worker production function shifts to the right. | 10 points Question 4 Creative destruction means that Answer | | firms develop new products that replace old products in the economy, thereby encouraging economic growth. | | | research and development should only be financed if research and development is incremental (a result of making small changes to existing products). | | | knowledge capital can be created through a system of government subsidies for education and research and development.
First is GDP, or Gross Domestic Product. This measures everything that a country produces in a year. Second is real GDP, which removes the effect of price changes. This is a more accurate measurement of the country's actual output, because it removes the impact of inflation. This makes it the best way to compare the GDP for any year to prior years.
Demand side policies are those that manipulate the level of aggregate demand (AD) to achieve one or more economic objective. The policies can be fiscal policies (changes in government spending and/or taxation), or they might be monetary policies (which are largely changes in the short-term rate of interest). The four major macroeconomic objectives are a sustainable level of economic growth; low inflation; low unemployment; and a medium term balance on current account. Recently the government have used loose fiscal policy and the MPC have reduced the rate of interest. These are designed to increase the level of AD and increase in national income.
Hence, the relevant corporate tax rate has to be the effective tax rate and not the statutory tax rate. DeAngelo and Masulis cite the findings of Corcoran2 and Holland and Myers3 based on the time series of effective tax rates, that firms use more debt during inflationary periods. This is because inflation increases the corporate tax rate due to the decrease in the real value of deductions that are based on historical book value. Similarly, Fame4 and Gonedes5 also give indirect evidence on the tax effects of inflation on historical costs. Based on the theoretical hypothesis of DeAngelo and Masulis, the following hypothesis is framed to test the relationship between corporate