Country P is a medium-sized Caribbean nation that is undergoing significant economic challenges. Recently, it has faced external shocks, including a decline in tourism, risking global oil prices, and a reduction in remittances from abroad. The government is eager to understand the economy's performance over the past year by calculating the nation's GDP using the expenditure method and assessing its future prospects, particularly in light of rising unemployment. Below is the economic data for Country P for the past year:- Household Consumption (C): $60 billion Government Expenditure (G): $35 billion Gross Private Domestic Investment (I): $25 billion Exports (X): $50 billion Imports (M): $65 billion Depreciation: $10 billion Unemployment Rate of Increase: 2% over the past year, reaching a total of 10% Natural Rate of Unemployment: 6% The government of Country P knows Okun’s Law and wants to assess how the rising unemployment rate will impact future economic growth, considering the difference between actual unemployment and the natural rate of unemployment. Calculate the GDP of Country P using the expenditure method. Calculate the Real GDP Growth Rate if last year’s nominal GDP was $140 billion and inflation was 5%. Using Okun’s Law, calculate the GDP gap for Country P, considering that the natural rate of unemployment is 6%. Discuss three potential consequences of the rising unemployment rate on the long-term economic prospects of Country P, considering Okun’s Law and Structural vulnerabilities. Evaluate how inflation and external dependencies are affecting Country P’s economy. How might these factors influence future fiscal and monetary policy decisions?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Country P is a medium-sized Caribbean nation that is undergoing significant economic challenges. Recently, it has faced external shocks, including a decline in tourism, risking global oil prices, and a reduction in remittances from abroad. The government is eager to understand the economy's performance over the past year by calculating the nation's GDP using the expenditure method and assessing its future prospects, particularly in light of rising unemployment.

Below is the economic data for Country P for the past year:-

Household Consumption (C): $60 billion
Government Expenditure (G): $35 billion
Gross Private Domestic Investment (I): $25 billion
Exports (X): $50 billion
Imports (M): $65 billion
Depreciation: $10 billion
Unemployment Rate of Increase: 2% over the past year, reaching a total of 10%
Natural Rate of Unemployment: 6%

The government of Country P knows Okun’s Law and wants to assess how the rising unemployment rate will impact future economic growth, considering the difference between actual unemployment and the natural rate of unemployment.

Calculate the GDP of Country P using the expenditure method.
Calculate the Real GDP Growth Rate if last year’s nominal GDP was $140 billion and inflation was 5%.
Using Okun’s Law, calculate the GDP gap for Country P, considering that the natural rate of unemployment is 6%.
Discuss three potential consequences of the rising unemployment rate on the long-term economic prospects of Country P, considering Okun’s Law and Structural vulnerabilities.
Evaluate how inflation and external dependencies are affecting Country P’s economy. How might these factors influence future fiscal and monetary policy decisions?

Definition Definition Increase in the amount of goods and services produced by a country in a given period of time compared to an earlier period. Economic growth is generally coupled with a rise in national income or the purchasing power of individuals. It is often measured in terms of the increase in a country's gross domestic product (GDP), or the overall monetary value of all the complete or final services and goods that a country can produce within its domestic boundaries in a specific period.

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