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There are four major components of GDP. Describe each of these components, including a discussion of the way in which each contributes to GDP.

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Introduction

Question 1 a) There are four major components of GDP. Describe each of these components, including a discussion of the way in which each contributes to GDP. The four major components of GDP(Y) are household consumption (C), investment (I), government spending (G) and net exports (NX). Their relationship can be express as an identity: Y=C+I+G+NX Household consumption (C), calculated in the Australian National Accounts as private final consumption expenditure, is the expenditure on goods and services by households, such as the Rose's dinner at Garden Hotel. It is made up of spending on durable goods (cars, appliances and furniture), non-durable goods (food, clothing, soap and petrol) and services (education, medical). Consumption can be influences by 4 main factors, they are disposable income (income-net taxes), expected future income, wealth, and interest rates. Consumption is a function of GDP because disposable income relies on GDP and net taxes are a proportion of GDP. Figure (a) shows positive the relationship between real consumption expenditure and real GDP. The bold line is an estimate of the consumption function for real GDP. Generally, the biggest portion of GDP is consumption, which averages around 60 percent. Consumption is regarded as the most stable component of GDP and investment the most volatile. Since disposable income can only be consumed or saved, and saving is equal to investment, the more consumption is, the less investment is. Gross investment (I) is the spending on new buildings (residential, commercial, and public), new inventory and new. For example, Jack purchases a new house. It is measured in the Australian National Accounts as private gross fixed capital expenditure.

Middle

This change in household behaviour is shown in the figure 1.2 as a movement along the supply curve from S1 to S2. Thus, the equilibrium level drops to E2. . c) A rise in real interest rate Investors focus the real interest rate rather than the nominal interest rate. The rise in real interest rate means that investors now should pay more to borrow for purchasing new capital. It alters the incentive of investment. Meanwhile, the real interest rate rise the return of saving, so it would affect the amount that household save at any given interest rate, That is to say, it would influences the supply of loanable funds. Because the incentive of investment decreased, firms would diminish the amount they wanted to invest, the quantity of loanable funds demanded would be lower at any given interest rate. This change is shown in the figure 1.3 as a movement along the demand curve from D1 to D2. The level of investment decreases. The quantity of demand decreased raise the interest rate from Ir1 to Ir2, and the higher level of interest rate in turn inspire the amount of private saving. The level of private saving therefore rises. As figure 1.3 shows, the quantity of loanable funds supplied increased from Q1 to Q2, which is represented by a movement along the supply curve. It results in a surplus (Q3 - Q2) at the Ir2 level. That is, the quantity of supply would exceed the quantity demanded as a result of the rise in real interest rate.

Conclusion

Usually, the higher the wages are the fewer workers would choose to leave. But the required payment for preventing the premium employers leaving is also dependent on a worker's prospects for finding a new job. If these prospects are high, (it means unemployment is low), such payment would also be high. Workers' productivity Higher wage make workers desire to stay in the job. Then motivate workers to do their best. Unemployment menace people with higher wage to work hard. If the wage is equal to the equilibrium level, there is no reason for workers to work hard, because they would find a job of same wage quickly. So, firms made wage higher, cause unemployment, and motivate workers do not shirk. Workers' quality Firms can attract higher quality worker by paying an efficiency wage. For example, Susan is a skilled worker and she would work for any wages above $10 per hour. Alice is a worker with lower skill level and she would work for any wages above $3 per hour. If a firm pay the wage of $11 per hour, both Susan and Alice would apply for the job and the firm can choose the proper one from the two. As a result, one would be unemployed. However, firms that pay efficiency wage could not afford to employ a very large amount at that wage. So the low unemployment would not be sustainable. The rate of unemployment would rise and, correspondingly, wages would fall until equilibrium was reached. Therefore, though paying efficiency wage would cause a short-term low unemployment. While this unemployment grows, the wages would be forced to fall until the unemployment is cleared at the equilibrium level. ?? ?? ?? ?? Katarina Page 1 of 14 5/7/2007

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