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National Income

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National Income

Did you know that national income is measured in several different ways? Yes, that's right! There are at least three different approaches to calculating national income! Why is it, you may ask? This is because the calculation of the income of a large country is a much more complicated process than calculating, say, an individual's income. Are you ready to go on a quest to find out how to measure national income? Then let's get going!

National income meaning

The meaning of national income is the aggregate income of the economy. Calculating it is a challenging task as a lot of numbers have to be added up. It is a rather complex accounting process and takes a lot of time. What would we know if we knew a country's national income? Well, we would gain a better understanding of quite a few things, such as the following:

  • Gauging the overall size of the economy;
  • Assessing the overall productivity of the economy;
  • Identifying the phases of the economic cycle;
  • Evaluating the 'health' of the economy.

As you can probably tell, calculating national income is an important task. But who is responsible for it? In the US, it is the Bureau of Economic Analysis and the report on national income they regularly publish is called the National Income and Products Accounts (NIPA). Various income sources combined make up a country's national income, often referred to as the gross national income (GNI).

National income is the sum of all the income made in the economy on an aggregate level. It is an essential measure of economic performance.

A nation’s income is a fundamental indicator of its economic structure. For example, if you are an investor who wants to expand the horizons of your company within the international market, you would emphasize the national income of the country you are going to invest in.

Therefore, a country’s national income accounting is critical for its development and planning from international and national perspectives. Calculating a nation’s income is an effort that requires rigorous work.

National income formula

National income formula depends on what type of calculation is used. There are three methods for calculating the income of any economy:

  • The income approach;
  • The expenditure approach;
  • The value-added approach.

The income approach

The income approach tries to sum up all the incomes earned in the economy. The provision of goods and services generates cash flows, termed income. There must be a corresponding payment for all the output generated in an economy. Calculation of imports is not necessary in this case as foreign purchases are automatically accounted for in this approach. The income approach totals incomes across several categories: employees' wages, proprietors' income, corporate profits, rent, interest, and taxes on production and imports.

The income approach formula is as follows:

\(\hbox{GDP} = \hbox{Total Wages + Total Profits +Total Interest + Total Rent + Proprietors income + Taxes}\)

We have an entire article on the income approach, so check it out!

- The Income Approach to Measuring National Income

The expenditure approach

The logic behind the expenditure approach is that someone else's income is someone else's expenditure. By summing up all the expenses in the economy, we can arrive at the exact figure, at least in theory, as in the income approach.

Intermediate goods, however, should be excluded from the calculation using this approach to avoid double counting. The expenditure approach, therefore, considers all the spending on final goods and services produced in an economy. Expenditures across four major categories are considered. These categories are consumer spending, business investment, government spending, and net exports, which are exports minus imports.

The expenditure approach formula is as follows:

\(\hbox{GDP} = \hbox{C + I + G + NX}\)

\(\hbox{Where:}\)

\(\hbox{C = Consumer Spending}\)

\(\hbox{I = Business Investment}\)

\(\hbox{G = Government Spending}\)

\(\hbox{NX = Net Exports (Exports - Imports)}\)

We have a detailed article on the expenditure approach, so don't skip it:

- Expenditure Approach

The value-added approach

Recall that the expenditure approach ignored the intermediate values of the goods and services and only considered the final value? Well, the value-added approach does the opposite. It adds all the additional values created at each step of the production process. However, if each value-added step is calculated correctly, the total sum should equal the product's final value. This means that, at least in theory, the value-added approach should arrive at the same figure as the expenditure approach.

The value-added approach formula is as follows:

\(\hbox{Value-Added} = \hbox{Sale Price} - \hbox{Cost of Intermediate Goods and Services}\)

\(\hbox{GDP} = \hbox{Sum of Value-Added for All Products and Services in the Economy}\)

The three ways of calculating national income provide a theoretical backbone for accounting for a country's economic performance. The reasoning behind the three methods suggests that, in theory, the estimated federal income should be equivalent, whatever approach is used. In practice, though, the three approaches arrive at different figures due to the difficulties in measurement and a massive amount of data.

Measuring national income in several different ways helps to reconcile the accounting differences and understand why they arise. Understanding these measurement methods helps to find the driving factors behind national income creation and, therefore, economic growth of a country.

Measurement of National Income

The measurement of national income is a complex task, without a doubt. There are few ways to measure a nation’s income, but they are more or less similar to each other. We call these measurement tools national income metrics.

No matter what the metric used to measure the national income is, the idea behind what to measure is more or less the same. What is a better way than following the very thing that we use for the exchange in an economy to understand the income in an economy? In any economy, every transfer, every flow of money leaves a trail behind. We can explain the general flow of money with the circular flow diagram.

National Income Circular Flow Diagram StudySmarterFig. 1 - The circular flow diagram

As demonstrated in Figure 1, there is a continuous flow of money as spending, expenses, profits, income, and revenue. This flow happens due to goods, services, and factors of production. Understanding this flow helps us to gauge the size and structure of the economy. These are the things that contribute to a nation’s income.

If you want to learn more about the interactions between agents and markets,

feel free to check our explanation:

- Expanded Circular Flow Diagram!

For example, if you are buying a good, you would transfer your money to final goods markets. After that, firms will take it as revenue. Similarly to this, to keep their production, firms will rent or acquire things from factor markets like labor and capital. Since households are providing the labor, the money will go through a circular movement.

National income is measured from these circular movements. For example, GDP equals the total amount spent by households on the final goods.

  • The most commonly used approaches to measuring national income are as follows:
    • Gross Domestic Product (GDP)
    • Gross National Product (GNP)
    • Net National Product (GNI)

Gross Domestic Product

In the contemporary world, we most often use Gross Domestic Product (GDP) as a measurement of a nation’s income. No matter what your background is, it is highly likely that you have come across this term at least once in your life. In a closed economy, GDP measures the total income of every agent and the total expenditure made by every agent.

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country’s borders in a given period of time.

In light of this knowledge, we say that the gross domestic product (Y) is the sum of the total investments (I), total consumption (C), government purchases (G), and net exports (NX), which is the difference between exports (X) and imports (M). Therefore, we can denote a nation's income with an equation as follows.

\(Y = C + I + G + NX\)

\(NX = X - M\)

If you want to learn about GDP in more detail, check out our take on the topic:

Gross Domestic Product.

Gross National Product

Gross national product (GNP) is another metric that economists use to evaluate a nation’s income. It is different from GDP with some minor points. Unlike GDP, the gross national product doesn’t limit a nation’s income to its borders. Therefore, citizens of a country can contribute to the country’s gross national product while producing abroad.

Gross national product (GNP) is a metric to evaluate the total market value of goods and services made by a country’s citizens regardless of the country’s borders.

GNP can be found with a few additions and subtractions to GDP. For calculating the GNP, we aggregate GDP with any other output produced by the citizens of the country outside of the country’s borders, and we subtract all output made by the foreign citizens within a country’s borders. Thus, we can arrive to the GNP equation from the GDP equation in the following way:

\(GDP = C + I + G + NX\)

\(\alpha = \text{Overseas citizen output}\)

\(\beta = \text{Domestic foreign citizen output}\)

\(GNP = C + I + G + NX + \alpha - \beta\)

Net National Product

All of the national income metrics are rather similar, and obviously, net national product (NNP) is not an exception. NNP is more similar to GNP than to GDP. NNP also takes any output outside a country’s borders into account. In addition to that, it subtracts the cost of depreciation from GNP.

Net national product (NNP) is the total amount of output produced by a country’s citizens minus the cost of depreciation.

We can denote the net national product of a country with the following equation:

\(NNP=GNP - \text{Depreciation Costs}\)

Components of national income

The five main components of national income from the accounting standpoint are:

  • compensation of employees,
  • proprietors' income,
  • rental income,
  • corporate profits, and
  • net interest.

Table 1 below shows these five main components of national income in practice.

Total Real National Income

$19,937.975 billion

Compensation of employees

$12,598.667 billion

Proprietor's income

$1,821.890 billion

Rental income

$726.427 billion

Corporate profits

$2,805.796 billion

Net interest and miscellaneous

$686.061 billion

Taxes on production and imports

$1,641.138 billion

Table 1. National income components. Source: Federal Reserve economic data1

The components of national income can also be understood through the components of the gross domestic product. Although we can calculate the national income from different standpoints on the circular flow diagram, the GDP approach is the most commonly used one. We list the components of GDP as follows:

  • Consumption
  • Investment
  • Government Purchases
  • Net Exports

We can think of consumption as any spending made by households except the spending made on real estate. In the circular flow diagram, consumption is the flow from final goods markets to households. For example, going into an electronics shop and buying a brand new laptop surely will be added to the GDP as consumption.

The second component of national income is investment. Investment is buying any good that is not a final good or a good that can contribute to the production of the final goods and services. The computer you bought in the previous example could be classified as an investment if a company bought it for you as an employee.

The third component of national income is government purchases. Government purchases are any spending made by a government for the exchange of any goods and services. If your government is paying the wage of soldiers and doctors, you can think of their wages as government purchases.

Finally, the last component is the net exports. Whether a domestically produced good or service is consumed outside of the country’s border (export) or whether a good or service produced abroad is consumed locally (import), we include them in the net exports component. The net exports are the difference between total exports and total imports.

National income vs. GDP

Is there a difference between national income vs. GDP? Turns out, calculating national income using the expenditure approach is the same as calculating nominal GDP (Gross Domestic Product)!

Recall the formula for the expenditure approach:

\(\hbox{GDP} = \hbox{C + I + G + NX}\)

\(\hbox{Where:}\)

\(\hbox{C = Consumer Spending}\)

\(\hbox{I = Business Investment}\)

\(\hbox{G = Government Spending}\)

\(\hbox{NX = Net Exports (Exports - Imports)}\)

This is the same as GDP! However, this figure is nominal GDP or GDP at current prices. Real GDP is the GDP figure that would allow us to see if economic growth occurred.

Real GDP is the value of all goods and services adjusted for inflation.

If the prices are rising but without corresponding increases in value, it may seem like the economy has grown in numbers. However, to find the actual value, real GDP needs to be used to compare the prices of a base year to the current year. This critical distinction lets economists measure real growth in value rather than inflationary price increases. A GDP deflator is a variable that accommodates the nominal GDP for inflation.

\(\hbox{Real GDP} = \frac{\hbox{Nominal GDP}} {\hbox{GDP Deflator}}\)

National Income Example

Let's back our national income knowledge up with some concrete examples! In this section, we will give an example of the national income of three different countries as represented by GDP. We have selected these three countries since they have clear differences in their national incomes:

  • United States of America
  • Poland
  • Ghana

Let us start with the United States of America. The United States has the highest nominal gross domestic product and surely an extremely complex mixed-market mechanism. Our second country is Poland. Poland is a member of the European Union and its sixth-largest economy by GDP. To clarify the difference, we have selected Ghana. Ghana has one of the highest GDP per capita in West Africa. Ghana’s main income is from raw export materials and rich resources.

First, let us illustrate the differences between Poland’s and Ghana’s GDPs. In Figure 2 the vertical axis represents the GDP in billions of dollars. The horizontal axis represents the time interval taken into account.

National Income GDP of Ghana and Poland between the years 1990 and 2021 shown on a graph StudySmarterFig. 2 - GDP of Ghana and Poland. Source: The World Bank2

But the most shocking results can only be seen when we compare them to the national income of the United States. We have illustrated the results in Figure 3 below where we can clearly see the gap between the national income of the United States and other countries.

National Income GDP of selected countries between the years 1990 and 2021 shown on a graph StudySmarterFig. 3 - GDP of selected countries. Source: The World Bank2

Gross national income example

Let's take a look at the gross national income example by looking at the US!

Figure 4 below shows the US real national income growth between 1980-2021.

National Income US national income growth between 1980 and 2021 shown on a graph StudySmarterFig. 4 - US national income growth between 1980-2021. Source: Bureau of Economic Analysis3

It can be seen from Figure 4 above that the US real national income growth has been fluctuating over the period. Major recessions such as the 1980s oil crisis, the 2008 Financial crisis, and the 2020 COVID-19 pandemic mark periods of negative economic growth. However, the US economy has been growing between 0% and 5% for the remainder of the periods. The post-pandemic recovery from negative growth to just over 5% gives an optimistic forecast for the US economy.

Explore more with the help of these articles:

- Aggregate Production Function

- Aggregate Expenditures Model

- Calculating Real GDP

National Income - Key takeaways

  • National income is the sum of all the income made in the economy on an aggregate level. It is an essential measure of economic performance.
  • The report on national income regularly published in the US is called the National Income and Products Accounts (NIPA).
  • Various income sources combined make up a country's national income, often referred to as the gross national income (GNI).
  • There are three methods for calculating the income of any economy:
    • The income approach;
    • The expenditure approach;
    • The value-added approach.
  • The most commonly used approaches to measuring national income are as follows:
    • Gross Domestic Product (GDP)
    • Gross National Product (GNP)
    • Net National Product (GNI).

References

  1. Federal reserve economic data, Table 1, https://fred.stlouisfed.org/release/tables?rid=53&eid=42133
  2. The World Bank, GDP (current US $), World Bank national accounts data, and OECD National Accounts data files, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD
  3. Bureau of Economic Analysis, Table 1.1.1, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey

Frequently Asked Questions about National Income

There are three methods for calculating the national income of any economy:

  • The income approach;
  • The expenditure approach;
  • The value-added approach.

National income is the sum of all the income made in the economy on an aggregate level. It is an essential measure of economic performance.

Various income sources combined make up a country's national income, often referred to as the gross national income (GNI).

Personal income refers to the income of an individual. National income is the income of everyone across the economy, forming an aggregate measure.

We use different methods to measure the national income due to the methods’ weak points. Furthermore, comparing the results of the two methods can give us different insights into a country’s economic conditions. For example, comparing GDP and GNP can inform us about a nation’s presence in the international markets and how much it is integrated into the system.

Final National Income Quiz

Question

What is investment equal to in a closed economy?

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Answer

When an economy is closed, investment is equal to the national savings.

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What is investment equal to in an open economy?

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Answer

When there is an open economy, investment is equal to the nationwide savings and capital inflow from other countries.

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Question

What is the loanable funds market?

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Answer

The loanable funds market is the market that brings savers and borrowers together.

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Question

Explain interest rate in the context of loanable funds market.

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Answer

The interest rate in the economy dictates the price at which savers and borrowers agree to either lend or borrow.

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Explain the demand for loanable funds market.

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Answer

The demand for loanable funds consists of borrowers looking to finance new projects they want to engage in. 

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Explain the supply of loanable funds market.

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Answer

The supply of loanable funds consists of lenders willing to lend their money to borrowers in exchange for a price paid on their money.

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Can the interest rate shift the supply curve or the demand curve?

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Answer

No the interest rate can't shift neither the demand or supply of loanable funds. It can only cause movement along the curve.

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What are some factors that can cause shift in the demand for loanable funds?

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Factors that cause shifts in the loanable funds’ demand curve include:Change in perceived business opportunities, Government borrowings, etc.

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How does a change in perceived business opportunities shift the demand for loanable funds?

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Generally, when there are positive expectations about returns from business opportunities, the demand for loanable funds will shift to the right, causing the interest rate to increase. On the other hand, whenever there are low returns expected from business opportunities in the future, the demand for loanable funds will shift to the left, causing the interest rate to decrease.

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How does government borrowings affect the demand for loanable funds?

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The amount of money that governments need to borrow plays an important part in the demand for loanable funds. If the governments are running budget deficits, they will have to finance their activities by borrowing from the loanable funds market. This causes the demand for loanable funds to shift to the right, resulting in higher interest rates. Conversely, if the government is not running a budget deficit, then it will demand less loanable funds. In such a case, the demand shifts to the left, resulting in decreased interest rate.

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What is the crowding out effect?

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Answer

Crowding out suggests that when there’s an increase in budget deficits, it will cause investments to fall in an economy.

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What are some factors that can shift the supply of loanable funds?

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Answer

Factors that cause the supply of loanable funds to shift include: Private savings behavior, Capital Flows. 

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Question

Explain how a change in private savings behavior can cause a shift in the supply curve.

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When there’s a tendency amongst people to save more, it will cause the supply for loanable funds to shift to the right, and in return, the interest rate decreases. On the other hand, when there is a change in private savings behaviour to spend rather than save, it will cause the supply curve to shift to the left, resulting in a rise in interest rate. Private savings behaviour are prone to many external factors.

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Question

Explain how capital flows affect the supply of loanable funds.

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As financial capital determines the amount borrowers have available for borrowing, a change in capital flows can shift the supply for loanable funds. When there are capital outflows, the supply curve will shift to the left, which results in a higher interest rate. On the other hand, when a country experiences capital inflow, it will cause the supply curve to shift to the right, resulting in lower interest rates.

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What happens to the supply of loanable funds when a country experiences capital inflows?

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When a country experiences capital inflow, it will cause the supply curve to shift to the right, resulting in lower interest rates.

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What are loanable funds market models used for?

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The loanable funds market models are used to simplify what happens in the economy when borrowers and lenders interact.

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Why interest rate is important for the loanable funds market?

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Interest rate is an instrumental part of the loanable funds market as it provides the incentive for savers to lend their money. On the other hand, the interest rate is also critical for borrowers, as when the interest rate increases, borrowing becomes costly, and few borrowers are willing to borrow money.

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When does unemployment occur?

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Unemployment occurs when an individual is looking for a job, but he/she cannot find one. 

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What is structural unemployment?

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Structural unemployment occurs when there are individuals seeking a job, but they are not able to find one because they don’t have the skills required or the number of jobs opened in an economy is lower than the number of people looking for a job.

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What's the difference between structural unemployment and other types of unemployment?

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Unlike other types of unemployment, such as frictional, structural unemployment is much more persistent and lasts for more extended periods. This type of unemployment has long-term consequences for the economy and can result from different factors.

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How do you know you are dealing with structural unemployment?

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Whenever you have more people seeking jobs than there are jobs in an economy, or whenever you have many unskilled individuals who cannot meet the demand for labor, you’re dealing with structural unemployment. 

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What are the factors that can lead to structural unemployment?

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There are many factors that could lead to structural unemployment. The main causes of structural unemployment you should know of are: minimum wages, labor unions, and efficiency wages.

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Explain how minimum wages lead to unemployment.

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In industries where there is a surplus of workers supplying their labor, companies would want to decrease their wages, but they can't really lower the wages due to the government's imposed minimum wage. In such a scenario, there are more people supplying their labor than there are companies demanding labor at the minimum wage rate. This will cause some people to secure jobs while others will remain unemployed.

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Question

Explain how labor unions lead to structural unemployment.

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Answer

When labor unions manage to negotiate higher wages for a certain industry where they have workers, this will discourage employers from hiring more due to the cost they face in improving and meeting the demands of labor unions.

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Question

Explain how efficiency wages lead to structural unemployment.

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Answer

When you have many companies providing efficient wages, it will make those companies very attractive. This will increase the number of people seeking a job in one of these companies, but only a limited number of workers will be hired. This will then cause an increase in structural unemployment.

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Question

What does it mean for the labor supply to slope downwards?

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Answer

It implies that when wages decline, businesses are more inclined to recruit new employees and vice versa. 

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Question

What are some examples of structural unemployment?

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Answer

Manufacturing industries, fruit-picking labor markets are examples of structural unemployment.

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Question

How individuals become structurally unemployed in manufacturing facilities?

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Answer

The manufacturing facility has much unskilled labor employed. Their job is to combine individual components into a finished product during clothes manufacturing. However, new technology is invented that can combine individual components into a finished product. It requires a small number of people to monitor the equipment. Some staff is hired to monitor and calibrate equipment, but the remainder must decide whether to continue their study or look for work in a new field. After introducing specialized production assembly technology, product assembly employees at a clothes manufacturing facility became structurally unemployed.

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Question

What happens to fruit-pickers when a fruit-picking robot is introduced?

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Answer

New robots that are able to pick the fruits will replace fruit-pickers. This will leave fruit pickers to be unemployed as their skills are no longer demanded. Additionally, they don’t have the skills needed to monitor the robots and help improve their algorithms. 

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What is the main disadvantage of structural unemployment?

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One of the main disadvantages of structural unemployment is creating inefficiencies in the economy.

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How does structural unemployment create inefficiencies in an economy?

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Structural unemployment occurs when many people in an economy do not have the necessary skills required for the job openings. This then leads to one of the main disadvantages of structural unemployment, which is creating inefficiencies in the economy. Think about it, you have a large portion of people willing and ready to work, but they cannot do so as they lack the skills. This means that those people are not used to producing goods and services, which could add more to the overall output in an economy.

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What does the theory of structural unemployment suggest?

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The theory of structural unemployment suggests that this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills.

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Why structural unemployment is harder to fix?

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This type of unemployment is harder for governments to fix as it would require a large portion of the labor market to be retrained.

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What is real exchange rate used for?

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One of the main uses of the real exchange rate is to get valuable insight into two nations' relative cost of living differences. 

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What changes the real exchange rate?

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There are three main determinants of the real exchange rate: nominal interest rate, foreign prices, and domestic price level. Any change in one of these variables will also cause a change in the real exchange rate.

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What is real exchange rate?


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The real exchange rate is the exchange rate that takes into account the price level difference between the countries.

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Question

What is the difference between nominal and real exchange rates?


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Instead of stating how much foreign money can be traded for a unit of local currency, the real exchange rate states how much products and services in the home nation can be swapped for goods and services in another country.

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What is the nominal exchange rate?

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The nominal exchange rate is the rate at which a currency may be exchanged for another currency at face value. 

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How is the nominal exchange rate calculated?

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The nominal exchange rate is calculated by determining the amount of foreign money that may be acquired for one unit of local currency. It is usually determined by supply and demand in the foreign exchange market.

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How does the nominal exchange rate impact the real exchange rate?

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Answer

An appreciation of the nominal exchange rate will cause the real exchange rate to appreciate, everything else being equal. A depreciation of the nominal exchange rate will cause the real exchange rate to depreciate, everything else being equal. 

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Question

Why an increase in the nominal exchange rate can lead to an appreciation of the real exchange rate?

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Answer

As you're counting the nominal exchange rate in terms of foreign currency per dollar, when the nominal exchange rate increases or appreciates, it means that one dollar can get you more of foreign currency. This implies that the real exchange rate value will be higher, everything else being equal.

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Question

How domestic prices affect the real exchange rate?

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Answer

Whenever there is an increase in domestic prices, there will also be an increase in the real exchange rate as it is positively correlated with domestic prices. The increase in the real interest rate means that your one U.S. good gives you more foreign goods. This makes sense as your local products are getting more expensive, each one of them should be able to provide you with more foreign goods.

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Question

How does the foreign price level affect the real exchange rate?

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Answer

An increase in foreign prices will cause the real exchange rate to depreciate, meaning that you would need more domestic goods in exchange for the same amount of foreign goods. Think of it this way: if the real exchange rate was equal to two, meaning two foreign goods for one domestic good, and then the real exchange rate decreased to one due to an increase in price levels of the foreign country. This means that you can get only one foreign good for one of your U.S. goods. So to get 2 foreign goods as before, you would now need more of U.S. goods.

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What are the factors that influence the real exchange rate?

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Answer

Factors that influence the real exchange rate are: Terms of trade, Monetary policy, Capital inflows, Trade restrictions.

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Question

How terms of trade influence the real exchange rate?

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Answer

Terms of trade are the relationship between the price of exported products and the price of imported items into the nation. Whenever you have export prices that increase more than the import prices, you will have positive terms of trade, and as a result, the real exchange rate will appreciate. 

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Question

How can monetary policy influence the real exchange rate?

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Answer

Monetary policy can influence the nominal interest rates directly, which would affect the real interest rate. If the Fed was to pursue an expansionary monetary policy, it would cause an increase in aggregate demand through lower interest rates. This would increase the price level in the economy. This will then cause the real exchange rate to appreciate as fewer domestic goods get you more foreign goods.

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Question

How do capital inflows influence the real exchange rate?

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Answer

Assume that there are more capital inflows than capital outflows, meaning more investment is coming in the country than exiting. This would cause an increase in demand for the local currency, which causes the nominal exchange rate to appreciate. As the real exchange rate is positively correlated with the nominal exchange rate, the real exchange rate will also appreciate.

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Question

How do trade restrictions influence the real exchange rate?

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Answer

Whenever the government decides to impose tariffs on imports, the real exchange rate tends to appreciate. Think about it: when tariffs are imposed, foreign goods become more expensive for domestic consumers; therefore, it will push domestic consumers to consume more of their own domestic products. This will lead to an increase in domestic products and, as a result, in a real exchange rate appreciation.

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Question

What is the Federal Reserve System?

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Answer

The Federal Reserve System is the central bank of the United States that ensures stability in the banking system and regulates the money supply in the U.S economy.

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Question

Why was the Federal Reserve System established?

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Answer

The Federal Reserve System was established in response to the financial crisis in the early 20th century in the US to give the nation a monetary and financial system that was secure, adaptable, and stable.

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