Fundamentals of Economics Essay

1121 Words Aug 6th, 2012 5 Pages
Q.: 1: The manuscript for this book was typed for free by a friend. Had I hired a secretary to do the same job, GDP would have been higher, even though the amount of output would have been identical. Why is this? Does this make sense? A.: 1: If a secretary were hired to type the manuscript, they would have had the opportunity to provide a service at a price. We know that each good and service produced and brought to market has a price. That price serves as a measure of value for calculating total output; in this case, the task of completing the typing for this book.
GDP is the total market value of all final goods and services produced within a nation’s borders in a given time period. If the job was undertaken by the secretary, the
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Q.: 3: If gross investment is not large enough to replace the capital that depreciates in a particular year, is net investment greater or less than zero? What happens to our Production Possibilities?
A.: 3:
Introduction: Changes in real GDP from one year to the next tell us how much the economy's output is growing. Net Domestic Product (NDP) equals GDP depreciation on a country's capital goods. NDP accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration. Depreciation, also referred to as "capital consumption allowance", represents the amount of capital that would be needed to replace those depreciated assets. Investment: Investment adds to the nation’s capital stock. An increase in capital shifts the aggregate production function outward, increases the demand for labor, and shifts the long-run aggregate supply curve to the right. Investment therefore affects the economy’s potential output and thus its standard of living in the long run. Investment is a component of aggregate demand. Changes in investment shift the aggregate demand curve and thus change real GDP and the price level in the short run. An increase in investment shifts the aggregate demand curve to the right; a reduction shifts it to the left.
Depreciation: We routinely use
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