Why should we worry about inflation? Which of the two measure of inflation shoul
ID: 1177461 • Letter: W
Question
Why should we worry about inflation? Which of the two measure of inflation should the fashion industry pay attention (CPI, PPI, both, neither)? Why?
Is full employment = zero unemployment? What is full employment or natural rate of unemployment?
Why do we only count final and new goods in the calculation of GDP? How about intermediate goods (production inputs) and used goods?
How can government actions or policies influence aggregate demand? Give an example.
What are the three economic indicators that tell us how the economy is doing? Briefly explain each factors purpose.
Which of the three economic indicators do you think matters most for the fashion industry?
1. U.S. unemployment rate for the month of June 2013.
2. U.S. inflation rate in May 2013.
3. U.S. real GDP for the first quarter in $ and % change.
Explanation / Answer
Why should we worry about inflation? Which of the two measure of inflation should the fashion industry pay attention (CPI, PPI, both, neither)? Why?
Inflation is the rate of change in the price level. As price level rises, it takes away the value of income and wealth held as money. That is, inflation reduces the purchasing power of an individual%u2019s income and wealth, you get less for the same amount paid. Thus, higher rates of inflation imply that we should reduce our wealth and income held as money and instead shift them into other types of assets.
The fashion industry should be pay more attention to the Consumer Price index. The demand for the final product sold by the industry, i.e. apparels will depend on the relative price of it with respect to other goods in the economy. Say, if apparels were relatively more expensive than food or healthcare, individuals will substitute away from it and shift to the relatively cheaper goods. The industry needn%u2019t necessarily look at PPI since the inputs used in its production process largely consist of labor and its price is not included in the PPI.
Is full employment = zero unemployment? What is full employment or natural rate of unemployment?
Full employment does not mean zero employment. Full employment implies that involuntary unemployment is zero. However there will be some unemployment which is due to frictional unemployment and structural unemployment. Frictional unemployment occurs due to imperfect information about jobs and job openings. Hence individuals remain unemployed while searching for a job that fits their choice. Structural unemployment occurs when there are sectoral shifts in employment patterns in the economy. For instance, the advent of computers shifted the demand for workers away from unskilled to skilled workers. The sum of frictional and structural unemployment is the natural rate of unemployment, the rate of unemployment when the economy is at full employment.
Why do we only count final and new goods in the calculation of GDP? How about intermediate goods (production inputs) and used goods?
We count the value of final and new goods only while calculating GDP because we want to avoid double counting of items. All goods when initially produced are included in the GDP in the year in which they were produced. Hence we include only new goods and not resale of old goods while calculating GDP. Final goods include the value of intermediate goods used in its production. Thus, if we include intermediate goods as well in the calculation of GDP then it will amount to double counting of the same good.
How can government actions or policies influence aggregate demand? Give an example.
The government can affect the aggregate demand directly through government expenditure. Higher government expenditure will increase the aggregate demand.
Indirectly the government can influence the aggregate demand through its tax policy. If the government reduces its income taxes then it increases the disposable income held by individuals and hence increase aggregate demand. Also, the government can increase investment subsidies which will stimulate private investment expenditure which in turn will lead to higher aggregate demand.
What are the three economic indicators that tell us how the economy is doing? Briefly explain each factors purpose.
The three economic indicators are:
Rate of growth of GDP %u2013 It tells us whether the economy is growing/ expanding or it is in a recession.
Unemployment rate- Higher unemployment rate indicates that the economy is operating below its full employment level.
Inflation rate- High rates of inflation can indicate inadequate supply or excess demand. Since inflation wipes away the value of money, the economy should undertake policies to reduce it.
Which of the three economic indicators do you think matters most for the fashion industry?
1. U.S. unemployment rate for the month of June 2013.
2. U.S. inflation rate in May 2013.
3. U.S. real GDP for the first quarter in $ and % change.
The US inflation rate in May 2013 will matter the most for the fashion industry. The goods produced by this industry are more of a non-durable nature. Hence if the good is priced relatively expensive to other goods, then individuals will substitute to other cheaper goods. As a result the industry will find its stock of inventories rising which becomes obsolete after the season ends.
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