Business Economics Principles: Market Economies Essay

Question:

Describe about the Business Economics Principles for Market Economies.

Answer:

Gross Domestic Product

The Australian economy is one of the biggest mixed market economies globally. The GDP of Australia Comprises of the total market value of all goods and services produced in Australia within a particular period. Generally, the GDP does not take into account depreciation and does not differentiate between the producers of services and goods. However, GDP comprises of only the total value of final products that are produced and sold within a particular period (Gross Domestic Product 2016). For this reason, the inclusion of items such as the purchase of used cars, pensions, and production of meals at home will have significant consequences on the Gross Domestic Product of the country.

The Production of Meals At Home

Usually, the GDP of a free market economy includes only the products that are sold through the market. As such, it only accounts for the products that consumers are willing to pay prices for the items they consume. For this reason, the GDP often excludes the products that consumers do not pay for. Therefore, the production of meals is usually not included in the calculation and estimation of the GDP of the country. In this regard, the value of outputs that are produced and consumed by households are entirely excluded from the GDP of the country.

By and large, the inclusion of the production of meals at home in the calculation of the GDP will have significant effects on the overall GDP of the country. Particularly, the total GDP will be much higher than the actual GDP. Mainly, this is because it would also warrant for the inclusion of other products and services that are sold between households. It is crucial to note that such an increase in GDP will not necessarily indicate economic growth and development in the country. Mainly, this is because there are no substantial increases in the total output of the nation or economic activities but a mere inclusion of household activities (Zorach 2010). Besides, it is very difficult to put values on home services that do not pass through the market, and therefore different values of GDP will be computed in a particular period.

Purchase of Used Cars

Typically, the calculation of GDP comprises of the total value of products and services that are produced within a given year. Mainly, products that are resold are excluded from the computation of the GDP of Australia. First, this is because the GDP of a country only caters for the products produced within a particular year. Therefore, if the car is produced in one year and sold or resold in another, it is not accounted for in the GDP of the year it is resold. In this regard, including the purchase of used cars in the calculation of Australia’s GDP will mean that the car is accounted for twice, yet it was only produced once (Janda 2016). As a result, it will increase the current GDP, indicating economic growth and increased production yet this is not the case. It will lead to a false indication of the improvement in economic conditions.

Moreover, including the purchase of used cars in the computation of the GDP will result in double counting, thereby leading to an incorrect valuation of the country’s current GDP. As such, before the car is purchased from its original owner, its value was computed and added to the country’s GDP. Therefore, adding the value of the used car again will result in double counting which is incorrect. Besides, such an inclusion will increase the country’s GDP, indicating an increase in production which may not necessarily be the case. Therefore, it is important that the purchase of items be excluded from the calculation of the Gross Domestic Product of a country, or an inappropriately high value will be reported.

Pension

Pre-funded pension refers to a situation where an employee sets aside a fund in the course of their career. The funds are then invested in by professionals in bonds, stocks, and real estate, among others with the aim that by the time an employee retires the original contributions of the plan will have generated enough to pay benefits for the rest of the employee’s lifetime (Barr & Diamond, 2006). It is noteworthy that pension is not included in the calculation of the GDP. Mainly, this is because they are not treated as payments for goods or services and therefore, do not signify a kind of final demand. Including pension fund in the calculation of the GDP will be a kind of double counting (Pension Spending 2016).

Specifically, pension payments are a form of transfer payments that involve the reallocation of money from one individual to another. Also, pension payments do not result in the production of new products or services in a given year. Therefore, unless the recipient of the pension uses the funds to buy goods or services, the pension should not be utilized in the computation of the nation’s GDP (Nardelli 2015). Including it in the GDP will create a false indication that the country is experiencing economic growth or an increase in the production of goods and services without this necessarily being the case (Pension n.d.).

Types of Unemployment

Unemployment refers to the phenomenon in an economy where individuals are actively searching for work are unable to find work. Conversely, the unemployment rate is the measure of the prevalence of unemployment within a country. It is measured as a percentage by dividing the total number of unemployed persons with the number of individuals in the labor force. The main types of unemployment include structural, frictional, and seasonal unemployment.

Cyclical unemployment

Cyclical unemployment is attributed to economic contractions and occurs when the economy experiences downturns in the business cycle. Sometimes, it is referred to as demand-deficient unemployment or Keynesian unemployment. It is imperative to note that this type of unemployment often results from the insufficient aggregate supply in the economy to provide employment opportunities for everyone who is actively looking for work (Diamond 2013). During the economic downturns, demand for goods and services falls significantly, and less production is required. Consequently, fewer employees are required to meet the equilibrium.

Source: (Nardelli 2015)

Structural Unemployment

This type of inflation occurs due to inefficiencies in the labor market. As such, it arises when there is a mismatch of skills required for the available jobs and the skills possessed by workers. Mismatch in skills or geographical location may arise due to occupation immobility, geographical immobility, and technological change. Occupational mobility results when there are jobs available, but the workers do not have the relevant skills to perform the job. On the other hand, geographical mobility occurs where the available jobs are far away from where the unemployed workers live, and it is impossible to relocate to the location of the job.

Technological change may result in structural unemployment where the economy goes through changes forcing some industries to decline and reduce production, thereby lay off some workers. A good example of structural unemployment caused by technological change is where an industry fires its employees and replaces them with robots (Amadeo 2016). The workers are forced to retrain for other jobs. It is imperative to note that a prolonged recession in the economy may also lead to structural unemployment. When workers remain unemployed for an extended period, their skills become outdated (Amadeo 2016). Therefore, unless they are willing and able to work at a lower level, unskilled job, they may remain unemployed even after the economy recovers from the recession. (Amadeo 2016).

Frictional Unemployment

This type of unemployment normally occurs when individuals are searching for work or are transitioning from one job to another. Generally, it arises when workers leave their previous employment and are yet to get new jobs. Notably, frictional unemployment is a natural part of the job search process and only lasts for a short term (Luke 2010). It exists mainly because jobs and workers are heterogeneous, and a discrepancy could result between the characteristics of the demand and supply. Since individuals take time to find the most suitable job for their skills and desires, frictional unemployment is likely to exist within the economy.

Classical Unemployment

Sometimes, this type of unemployment is referred to as real wage unemployment. Typically, it occurs when wages are kept above the equilibrium level. It is triggered by minimum wage legislations and powerful trade union negotiations that set the minimum wage above the equilibrium wage rate. As a result, there is a surplus supply of labor as more workers are enticed by the new set wages. On the other hand, firms are unable to meet the new minimum wage requirements and decide to lay off some workers. Eventually, this leads to real wage unemployment as wages are sticky downwards (Amadeo 2016).


Source: (Amadeo 2016)

Voluntary Unemployment

Voluntary unemployment occurs when individuals are able and capable of finding work at the prevailing economic conditions but choose not to work. Often, this is ascribed to the view that individuals prefer to wait for jobs that offer a higher wage rate or jobs that match a particular standard that they have set for themselves. When the wage rates are unusually low, the unemployed may have little incentive to enter the job market (Unemployment Types 2010).

Seasonal Unemployment

Seasonal unemployment arises due to the seasonality of some industries. It is a form of natural unemployment that results from regular changes in the season of business. Industries that may be affected by seasonal unemployment include ice cream vendors, ski instructors or tourism and resort workers (Mortimer 2014). Also, agricultural industries experience seasonal unemployment between the planting and harvesting seasons. Similarly, construction workers are left unemployed during winter in countries that experience winter.

Is structural unemployment more or less serious than cyclical unemployment?

In most cases, permanent jumps in the rate of unemployment are associated with structural unemployment. Many economists argue that while cyclical unemployment result from rises and falls in the business cycle, structural unemployment persists for long, even when the economy is experiencing substantial economic growth and development (Burtless 2012). Once structural unemployment is embedded in the economy, it is almost impossible to get rid of it (Burtless 2012). Over time, the traditional remedies for unemployment become less effective. For this reason, structural unemployment is more severe than cyclical unemployment.

Reference List

Amadeo, K 2016, 9 Types of Unemployment [Online] Available from: [Accessed 25 Oct. 2016].

Australian Government Department of Human Services, Age pension. [Online] Available from: [Accessed 25 Oct. 2016].

Barr, N and Diamond P, 2006, The economics of pensions, vol. 22, no. 1, pp. 4-16 Available from: [Accessed 25 Oct. 2016].

Burtless, G 2012, High unemployment: Cyclical or Structural? [Online] Available from: [Accessed 25 Oct. 2016].

Diamond, P, 2013, Cyclical Unemployment and Structural Unemployment. [Online] National Bureau of Economics Research Working Paper 18761. Available from: [Accessed 25 Oct. 2016].

Economy Watch, 2010, Unemployment Types [Online] Available from: [Accessed 25 Oct. 2016].

Econport, 2016, Types of Unemployment [Online] Available from: [Accessed 25 Oct. 2016].

Janda, M, 2016, GDP: Australian economy grows 3.3pc over past year on secret fiscal stimulus [Online] Available from: abc.net.au/news/2016-09-07/gdp-economic-growth-data-abs-june-quarter/7822286 [Accessed 25 Oct. 2016].

Luke, J, 2010, Frictional, structural, Cyclical Unemployment defined. [Online] Available from: [Accessed 25 Oct. 2016].

Mortimer, R 2014, Seasonal unemployment explained. [Online] Available from:www.romeconomics.com/seasonal-unemployment-explained/ [Accessed 25 Oct. 2016].

Nardelli, A 2015, Unsustainable futures? The Greek pension’s dilemma explained [Online] Available from: [Accessed 25 Oct. 2016].

OECD, 2016, Pension spending [Online] Available from: [Accessed 25 Oct. 2016].

Parliament of Australia, 2016, Gross domestic product [Online] Available from: [Accessed 25 Oct. 2016].

Zorach, A 2010, Why GDP (Gross Domestic Product) is a Poor Measure of Wealth and Prosperity [Online] Available from: [Accessed 25 Oct. 2016].

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