Analyse the strengths and weaknesses of GDP as a measurement.
Strengths of GDP as a measurement
1) It helps in making international comparison among different countries regarding their economic performance.
2) It helps in determining the effect of increased production of goods and services.
3) It helps in making inter period comparison of economic performance of a country (i,e, over different time periods)
Weaknesses of GDP as a measurement
1) It does not exhibit the distribution pattern of national income. If increase in GDP is mainly due to increased production of war equipments and ammunitions, instead of machinery and capital equipments, such an increase will not be associated with any improvement in economic welfare.
2) If increase in GDP is due to rise in prices and not due to increase in physical input, then it is not an index of economic welfare.
3) Many non-market services such as services of housewife are not included in GDP due to non-availability of data. However, such activities increase economic welfare.
4) GDP does not consider changes in population of a country. If rate of population growth is higher than rate of growth of GDP than it will decrease the per capita availability of goods and services.
2. Distinguish frictional, structural and cyclical unemployment. How is unemployment measured? What are the costs of unemployment and how can policy makers reduce its impact?
Frictional unemployment takes place when people switch over from one job to another. In many cases the tenure of job gets over and workers remain unemployed till they get another job. In other cases workers migrate from one region to another in search of better jobs or opt to remain out of job for short time periods. Frictional unemployment takes place because in an economy with imperfect information job search and matching is not smooth and there are frictions in the economy.
Structural Unemployment results from the mismatch between supply and demand for different kinds of jobs. Structural unemployment takes place largely due to shifts in an economy and adjustments to such shifts take time.
Cyclical Unemployment arises due to fluctuations in aggregate demand. When aggregate demand declines, there is simultaneous decline in the demand and consequent increase in unemployment. On the other hand, a general boom in the economy increases demand for labour and unemployment decreases. Thus, overall employment is pro-cyclical in nature.
The rate of unemployment u is the ratio of unemployed persons to total labour force.
Costs of unemployment-
1) Loss in output as the economy is not at full employment level.
2) Loss of output results in loss of income
3) Loss of income results in a decline in aggregate demand which further lowers income, output and employment.
4) It affects the income pattern in the society. It hits the poor harder than the rich.
The policy makers can reduces its impact by providing unemployment benefits so that aggregate demand does not fall and so the level of output and income. The policy makers can pursue loose monetary and fiscal policies so that aggregate demand rises and therefore production, output, income and employment also rise.