Economic Factors and Its Measurements

Gross Domestic Product

This is the total market value of all final goods and services produced within a country in a year. It shows the size and value of the local economy concerning other economies and is considered an indicator of a country’s living standards. GDP can be determined through approaches that focus on the use of products, Income and the level of expenditure. The product approach presents the most common sum outputs of every sector within the economy. The expenditure approach presents the total value of products as a function of people’s purchasing power. Mathematically GDP is expressed as Y = C + I + G + (X − M). Where (Y) is the sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).

In the year 2002 U.S.A had a GDP value of $10.49 trillion eight times to that of China’s GDP value of $1.27 trillion. In the year 2004, the difference reduced to seven-fold as economists predicts that by the year 2013 China’s GDP will have surpassed the U.S.A. GDP. Several factors responsible for this growth of China GDP are high savings rate, good business environment and favorable Chinese economic policy (Woo, 1994).

Business Cycle

The business cycle presents the level of fluctuations experienced within the various economic activities within a nation. The calculations are based on the values obtained from real domestic products. The business cycle is determined through various stages of economic growths and economic recess (Burns and Mitchell, 1946). According to economists, the kind of economy has a high unemployment rate, monetary and fiscal policies obtain positive results in smoothing fluctuations.

Business cycles are usually categorized based on annual duration (Schumpeter, 1954). During the 1960s economic growth in the U.S.A, the Phillips curve was attributed to economic growth; however, the occurrence of recession within subsequent years discredited this theory. Based on economic stability within the 1980s business cycle was channeled towards growth only to be curtailed in the late 2000s through recession effects.

Unemployment

The rate of unemployment could be defined at the level of the labor force that does not have formal employment. The rate is not presented as a percentage of the total population. This is because the population is comprised of three distinct groups; those who are still institutionalized believed to be below sixteen years of age, then those not within the confines of the labor force and those above the age of sixteen willing and can work.

The existence of part-time and discouraged workers tend to understate the actual rate of unemployment. Unemployment is divided into frictional structural and cyclical, whereby frictional involves those in search for jobs while structural refers to those occurring as a result of changes in the structure of demand for labor. Cyclical unemployment results from recession consequences (ILO, 2007).

The natural rate is the kind of condition attained at the point when the labor market is almost equal where the number of those looking for jobs equals the available job vacancies. This rate is never constant or fixed because it fully depends on the percentage makeup of the labor force together with the prevailing culture within nations. The drop in natural rate experienced within the USA could be attributed to the aging workforce and improved technology. The drop is estimated to be approximately five percent. The rate more so depends on the demographic makeup of the population (ILO, 2007).

Inflation

This could be defined as the variation in price levels either rising or falling. The rate of inflation is measured through the use of the Consumer Price Index (CPI). It is expressed as a percentage and calculated by subtracting the previous year’s price index from the current year and then dividing the results by the previous year’s index expressed as a percentage. Deflation affected the world during the 1930s depression where there was a wide experience of price and wage decline.

Angola experienced one of the most recognized astronomical inflation rates in the year 1996 which was placed at 4,145%. The price index has been used to deflate nominal income into an exact income. Individual income may be reduced by the rate of inflation but the change cannot reduce the whole economy of a region. Adjustment on spending is possible for those anticipating inflation, this could help in reducing its effects on individuals.

Those depending on fixed income groupings suffer loss owing to the reduction of their real income which does not increase with the rise in prices. Those who save also fall victim to unanticipated inflation since the rate of interest may not be sufficient to cover inflation costs, this leads to a loss in purchasing power. The situation where resource prices rise unexpectedly is known as cost-push inflation and causes a decrease in output per person and at the same time decline in employment (Schumpeter, 1954).

Interest rates

This represents the percentage at which borrowed money is repaid to a financial institution with payments made over a stipulated time. Most organizations use interest rates to ascertain their liquidity policies while individuals use it as a means for improving the standard of living. The nominal interest rate presents the amount of money payable on top of borrowed or deposited money while real interest rate presents the adjustments done on the nominal rate. Calculations on the present value of loan are based on an equation which converts future payments into the current monetary equivalent (Schumpeter, 1954).

F= Repayment of principal + payment of interest, P= f/ (1+i) where f is future payment and i is the interest rate.

It has been the work of national governments or central banks to set interest rate levels. Attempts to counter spiraling hyperinflation in 2007, the Central Bank of Zimbabwe increased interest rates for borrowing to 800% (Kitchin, 1923).

References

Burns, A. & Mitchell, W. (1946). Measuring business cycles. New York; National Bureau of Economic Research.

ILO, (2007). Resolution concerning statistics of the Economically Active population,

Employment, unemployment and underemployment. Thirteenth International Conference of Labor Statisticians (10), 4.

Kitchin, J. (1923). Cycles and Trends in Economic Factors. Review of Economics and Statistics, (5), 10–16.

Schumpeter, J. A. (1954). History of Economic Analysis. London; George Allen.

Woo, W. (1994). The Art of Reforming Centrally Planned Economies: Comparing China, Poland, and Russia.” Journal of Comparative Economics, (3), 276-308.

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