The three-way to measure GDP is the expenditure approach, income approach and output approach (Gregory, 2017). Expenditure approach is the base on the total expenditure in the economy, it income the net export, consumption, investment and the government expenditure. The income approach is base on the aggregate national income, depreciation in the asset, any sale tax, and the net foreigner income. Production factor is base on value-add and the net production factor.
Expenditure approach is base on the total expenditure or aggregate demand in the whole economy. It influences the factor such as net export, consumption, investment and the government expenditure. (Gregory, 2016)That factors are the government or private sector inject or bring the money back to the production. (Gregory, 2016)For example, the investment will bring the expansion plan to the company that will lead the company to hire more employee to help them increase their scale business and sale revenue. (Gregory, 2016)
The income approach measures the total income of the income intent of expenditure. (Gregory, 2016)That includes the aggregate national income that counts all recorded domestic resident's income, the sale tax that collects from day to day goods' transaction, the depreciation of all recorded tangible asset and the net foreigner factor income that come from the overseas worker. （Gregory, 2017）
Output approach method base on the net national product, It is calculated by the difference on the sum of total market value on goods and services and depreciation.
Question 1.b
The real Gross domestic product is the measurement of the actual amount of the producing output that does not contain the element of the inflation in the economy. It usually is below the nominal GDP. (Gregory, 2016)The nominal GDP content everything including the value that causes the inflation.
Question 1.c
The purchase power parity is a theory of exchange rate that suggests any unit of the observed currency able to buy the same quantity or quality of the basket goods and services all over the world. (Gregory, 2016) . If the price of the product is fall, people will come and buy and push up the price again, and the PPP is base on the same theory. When the exchange rate is fall in one country, people will buy the product from that country because the price is relatively lower. It will push the demand for that currency and increase the exchange rate to the equilibrium.
PPP has more advantage than the market exchange rate because it eliminates the bias of the government exchange rate policy, For example, the government might use the monetary policy to accelerate depreciation through manually therefore when we use the market exchange method to measure that currency will over or underestimate the real purchasing power. If we have the basket good at as an indicator, it will help to measure the actual producing power.
Mr Wolf mentions that if use the PPP as an indicator will make GDP higher because it eliminates the bias of the policy. Because nowaday most of the GDP are using US dollar to measure. But the fact is the US dollar purchasing power might change when the US government using the economic policy to regulate. So it might cause the bias in the international market. (Gregory, 2016)
Question 1.d
The good growth economic growth rate in world economy is thanks to the technology revolution that boosts our productivity in the large scale. We have the hard lesson from the financial crisis. Mr wolf state that the bad politic and war cause too much damage to the world economy. People have the harsh lesson especially the country that has heavily suffer. . (Wolf, Financial time)Those countries' elite class have the confidence and the ability to avoid those potential risk and help with the GDP growth. Also, They make the politics peaceful and less willing go to the war with other. It helps the economic growth after the world war two because of their production use in the economy instead of using in the war. War is a political action that will damage the world economy and fall in the GDP growth rate.
On another hand, the lesson of the great depression reminds the politician to need to plan the strategy of the country economics from long-run perspective instead of short-run perspective. (Wolf, Financial time)It will minimise the risk that will cause the crisis in the future. For example, most of the country nowadays have the authority that monitors and regulate the financial market to prevent the Great depression happened again.
2.a
In the short term, the factor that will risk the economic growth is the level of the debt rising, and the overestimated the value of the asset. (Wolf, Financial time)
The debt rising will potentially squeeze people's disposable income, and the possibility of the bad debt or financial crisis happen in the economy. When most of the people fall into the circumstance that they borrow a lot of money from the bank, it might squeeze their income because they have to pay the debt. It is hard for them to use the money do other investment and the expenditure. When they cut the expenditure, they might face the fall in the GDP. If they come to the circumstance that they cannot repay the interest and the loan, it will happen bad debt. Bad debt means the bank cannot collect any money back from the loan. If a lot of people in the economy suffer from that, the bank will find them self in the position that they have too much bad debt, and they may have the insufficient reserve for withdrawal. It will be robust the trust system and cause people have no money to use. When they don't have the cash, the expenditure will fall and cause the company cannot generate enough cash flow to keep the company running. They can't borrow from the bank because the bank faces same trouble. It will lead the economy into the recession. Furthermore, because the world economy is connected if the financial system in a country broken, it will influence another country through trade, and other transaction and lead the entire world economy into the recession. The World financial crisis in 2008 is a good sample. If the financial authority takes action and controls the financial service provided by the financial institution, it can maximise the chance avoid the financial crisis.
The overvalued asset will make the people make an irrational investment in the asset. It will boost the leverage of the investment, and create a bubble in the economy. However if someone finds out that the value of the asset has overestimated and they undersold the asset to avoid the potential fall in the value to damage him or herself. It will lead to an irrational undersold of the asset. The bubble has been pop. The population asset will be steam at the moment. The typical example is a great depression. Stock value has overestimated, and people sold the asset to minimise the loss and finally lead the entire world economy been damage. It involves countries monetary policy and the authority to regulate and country the market.
To conclude, the debt over lending and the overvalued are the threat for short run because they make people make the irrational investment and causing fall in the GDP. That threat can be slot and discover in the short term by Government monitor.
2.b
The real interest rate the nominal interest rate minus the inflation rate. It shows as the real interest rate= Nominal interest rate – inflation rate. The Nominal interest rate is the actual interest rate that we see in the day to day basis. However, the inflation squeezes the purchasing power of the currency. So the actual amount of real value interest they pay might be reduced.
2.c
The risk that threatens the economic growth is the war, depression and the missing of the authority on the Financial market. (Wolf, Financial time)If we see the statistic data from financial time, the main reason that force economy enter recession or even depression are the war and the authority is not doing their job.
The war is a human activity that caused destruction and consuming GDP of the country instead of help and boosting them. We agree that the manufacturing weapon can stimulate the economy because of it create job opportunity and income boost. (Wolf, Financial time)However, the war will destroy the infrastructure, reduce the labour size and other than eliminate the size of the working population. If the working population declined in the economy, the economic activity people would fall because they have to participate in the frontline then working in the factory manufacture the goods or providing the service. Therefore it will lead the fall on the economic growth. If the participant of the war is the major power of the world economy, it will cause catastrophic fall in the world economy. World war one and two are good examples because of they show us what will happen to the economy when the infrastructure destroyed, working population losing in the war. Those main participants suffer massive loss from the economy.
If the war happens in the place that exporting the essential material for economic development, it will damage the world economy but not on a large scale because of the main participant, and the war zone usually doesn't produce the good that has high add value and be limited in a small region. (Wolf, Financial time)Even they destroy a lot of things, the scale of the war will not cause damage as the world war did. However because the Gulf war and the third middle-east war causing the oil shock, it damages the economy on insufficient energy involve in the production and meet the consumer needs.
The war refers to the politician underestimate the damage cause the economy and too aggressive to solve the issue instead of claim down and peaceful.
The politics or the misplace of the authority has the responsibility on those financial crises we have seen in the world economic history. The great depression caused by lack of monitor on the stock market, all the stock price has been overvalued, suddenly someone starts to undersell the stock and create a series of catastrophic fall on the value of the stock. Most of the people lost all their asset. If the authority can step out and regulate the market to prevent people overvalue the asset and assist the soft landing, it will help people, not to lose money in one day.
The Asian financial crisis is the government lack of monitor and control over the financial market. They should control the bubble of the economy and prevent bubble being pop and try to soft land the economy. However, those countries that suffer the massive loss of the economy didn't manage to prevent the economy from pop and cause the financial crisis. The global financial crisis caused by the bank over lending the money and causes a lot of the bad debt. The bad debt cause the bank didn't have sufficient money for withdrawal and led the people losing all their money store in the bank, company bankrupt and people lose their jobs. They will reduce overall expenditure and lead the economy to enter the recession period.
To conclude, the economy is caused by the bad politic and war.
3.a
From 1990 to 2017, the overall world GDP show fluctuating growth. From 1990 to 2008 it has shown a trend of a rapid increase. The purchasing power parity is growth from around 2% to 6%. After the 2008 global financial crisis, the economic growth didn't have any rapid growth since 2010 and even show an overall downward slope.(Mr Wolf, Financial time)
Those recessions caused by the war and lack of the government monitor on the financial market. The Asian economic crisis is a typical example that the government lack of country on their country finance. As we know that the nation must have the financial authority to regulate the health of the domestic financial market, their currency overestimated and had the potential bubble inside it. Once the bubble has been pop by someone, the crisis will happen. Those Asian countries who suffer from the financial crisis have lost most of their wealthy and become poverty.(Stanley, 1999). Those countries are responsible for most of the world production. Since they face the financial crisis and causing most of the people face the unemployment, they unable to contribute to the world GDP and creating the recession going on.
The secondary loan market caused the Global financial crisis in 2008. It causes by the bank over lend the money to people who can't pay their loan. (Bodie, 2013)Therefore they have to sale the loan to the secondary loan market to increase the value to gain profit(Zvi Bodie, 2012). However when the value of those loan collapse. It causes the global financial crisis because the bank and the insurance company who hold the loan didn't have the money for people's withdrawal. It causes people suffer the heavy loss of the asset, and the cash flow for the company cannot maintain. Because the world economy has connected, the financial crisis has transport from the USA to the entire world and cause a lot of the company bankrupt. It increases the unemployment rate. The expenditure and the income for most of the country have fallen. It causes the fall in overall GDP.
The gulf war probably is the only recession that causes the world according to the Chart show. It happens in the place which is the oil exporting region, and most of the country involve the war and cause the recession.
3.b
The great depression and the recession has a common point they both have a negative economic growth rate. During recession period people will save more and cut down consumption and the investment, the company could have faced a pull down in the profitability and them to execute redundancy to make sure the company can pass this difficult period. Recession period usually cause by the nature of the economic growth cycle. When people are earning more, they going to spend more, and it will indirectly increase the price of the good by increasing the aggregate demand. The increase in the aggregate demand will cause the inflation. Due to the inflation, it might cause some of the company face the difficulty of running because the inflation reduces the purchasing power of the currency, they have to pay more money to buy the same quantity of the good, their cost of the business will go high. On the other hand, the inflation will force the employee to ask more wage which adds another burden to the company day to day running basis. They will fire some employee to make sure company finance still operating at the healthy level. However, when most of the company doing the same, it will cause the rise of the unemployment rate. It will cause people to save more. Due to the economic cycle period, when people save more, less money flow in the economy. It will lead to less expenditure and slow or negative economic growth. After the recession, the government will increase the government expenditure to help the economics to cover. Because the recession will reduce the price of the good, the people who have saving might start to consume or invest. It will bring the money to the economy and help it to recover. Depression is a depressive version of the recession, which means it is more severe than the recession. (Gregory, 2016). It might force massive money level the economy. If we see the chart in the coursework, depression is steeper than other recession but flatter than the war. The recession usually makes the company redundancy depression will cause a massive scale of companies bankrupt and a rise in the unemployment rate. In the great depression, nearly most of the company face the bankrupt.
The Depression usually caused by the broken of the trust. For example, the value of the particular asset has overestimated and made the people or company invest an overestimated asset without a reasonable judgement. Therefore when someone finds that the asset they hold has overestimated, they will undersell. When people see someone has undersold, they will act same because of fear. Therefore it will cause the stock or commodity market has avalanches fall on every stock and the good price. It will cause many companies face the problem of cash flow. They will bankrupt. When they bankrupt, it will cause people losing job become unemployment. When most of the people face the unemployment, they will not be able to consume. When the expenditure cut, the GDP will fall. If it forces the entire economic fall into the negative feedback that will cause the economy fall. The great depression and the global financial crisis are base on this reason. Before the great depression the value of the stock in the wall street has to overestimate, and when people suddenly find out that the value has too much bubble, they will be undersold and try to control the lost and cause the avalanche fall in the investment and other expenditure. The global financial crisis and great depression are the same, and the difference is the stock becomes the secondary loan, and the government has taken action to prevent a greater loss.
3,c
The oil shock is the shortage of the oil in the world major developed country. Those country occupy most of the world GDP percentage, and they heavily relied on the oil supply to maintain the economy running. Because their private transport and public transportation system are base on those fossil fuels to maintain the running, the shortage of the oil will cause they unable to maintain their economy. For example without the transportation, their good and the people cannot travel place to place with high efficiency. Therefore it will reduce their productivity in the entire country. When the productivity fall, it will cause the goods rise in the country and increase cost of the living. It will develop that the people reduce the expenditure and try to save much of the money as they can. If we use the expenditure approach to measure the gross domestic product, the reduce in consumption will pull down the aggregate demand and lead to the fall in the domestic product. In this scenario, the GDP of those developed countries will heavily suffer. The typical example is the USA. The USA is a country base on the car wheel. Their transportation relied on those truck transport goods follow the supply chain. The cut down of the oil supply will damage the Supply Chain. As a consequence, the economy goes bad. If we speak to a large scale, the entire western countries .
What causes the oil shock? If we see the timeline of the major oil export country, the first oil shock is right after the third middle east war. The reason is the USA choose to support Isreal to win the third middle-east war and cause Arabic alliance lost the war. Arabic world revenge thought Sanction on exporting oil to the USA and those countries who belong to Nato. Therefore it leads to the consequence that the USA and its allied face the problem on the shortage of the oil. The oil shortage causes the productivity of those industrialised countries fall, and they forced to face the recession. It is a typical recession that causes by the politics rather than an economic cycle or lack of control on finance.
The Iraq and Iran war is the source of the second oil shock. Because the two of the major oil exporting fall into the war, it reduces most the oil supply in the world. It causes the similar thing as the first oil shock did, but it stops those two countries stop exporting oil through a stable way. It is another typical example of how the politic will influence the economy. War is a political act, and each political action will direct or indirectly affect the economic development. Especially the politic with the essential material exporter. The oil is the soul and the blood that maintain the human modern. Economy. The shortage will cause damage to every country that needs the oil to make the machine operating
To Conclude the oil shock is a typical example that how the war and the politic affect on the global economy especially deal with the oil exporter country.