Economic Perspectives

Economic Perspectives

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1) Gross Domestic Product (GDP) is the total value of all the final services and goods which are produced for one year in a country. Gross National Product (GNP) is the total market value of all the services and goods which are produced by the property and labour that is supplied by the country’s resident in a duration of one year. Net Domestic Product (NDP) is the GDP minus the capital depreciation. The four ways of looking at GDP are:

i). The output measure is the approach in which we find the total output of the country by finding the total value of the services and goods which the country produces.

ii). The income measure is the type of approach which tries to equate the country’s total output to the resident’s total factor income that they receive.

iii). The uses (of income) measure shows that every purchase of new services and goods in a country over a duration of one year should be equal to the income that is generated in that one year.

iv). The Expenditure measure is the approach in which we find out the total output of a country by trying to find out the total amount of money spent by the country.

2) Using the IS-LM framework, The IS-LM shows the combinations of the level on income and the interest rate. The slope of the IS curve is usually inversely related to the MPC (Marginal Propensity to consume) and the interest rate. If there is a reduction in the interest rate, there is an increase in the level of income.

An expansionary monetary policy will lead to an increase in the equilibrium level of income. This will make the LM curve to shift downwards because there is an increase in the liquidity of the money market and it further reduces the interest rates.

3) Money is anything that is generally accepted as a payment for services and goods and is used as a store of value, a unit of account and as a medium of exchange. A fractional-reserve banking system can take a $1000 of “high-powered” money-like cash deposited by a new immigrant- and expand the overall money supply by some multiple of that amount. This money deposited by the immigrant is used as a store of value since it can be easily saved, stored and in the end it can be retrieved.

Money multiplier is the static of central bank money since it is based on the quantities of the measures of money supply which is shown by the equation;  which shows that money multiplier is the reverse of the reserve ratio. This “money multiplier” is at times quite unpredictable because the value of money does not remain stable over some time due to certain aspects like inflation.

4) The central bank like the US Federal Reserve bank has all the direct control over all the money in circulation in the open market operations (OMO). The rate of lending money can be chosen by the central bank.in the OMO, the central bank buys up the securities with money which leads to an increase in the money in circulation since there is more money being printed which lowers the supply of the securities. The selling of the securities leads to a decrease in the money supply. Feudal funds are the interest rates charged by banks for loans. By the increase in the bonds supply, it reduces their prices and it increases the interest rates.