Gross Domestic Product is ideally, total market or monetary value of goods and services
produced in a given country over a specific period of time. GDP gives a complete view of how a
country's economy is fairing. GDP can be calculated on an annual or quarterly basis. The
calculation includes; investments, government outlays, public as well as private consumption,
and finally the foreign balance of trade. In the balance of trade, we add the value of and subtract
the given value of imports. On all the variables that consist the country's gross domestic product,
the given balance of trade is very critical (Henderson, 6). The GDP increases when the amount of
exports exceeds the imports. In such that case, a country is said to experience a surplus in trade.
In a case where it is the opposite, that is the cost of imports is greater than the exports, then a
nation is said experience a deficit in trade. In this case, the GDP of a country decreases.
There are several ways that GDP can be measured for use in different purposes. One is
the Nominal GDP. This is basically gross domestic product calculated at the then market price
(Henderson, 8), using the market rate of money exchange in dollars, or local currency to compare
different countries' GDP. It can also be measured using the Purchasing Power Parity method,
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which considers the local prices difference and that of cost of living in a country so as to make
an exact comparison from real income, Output, and the standards of living. Gross Domestic
Product is also measured by GDP per Capita. In this case, it is estimated from every individual in
a country's population. Per Capita GDP gives the income or Output per person in an economy. It
can also be provided in real, nominal, or Purchasing Power Parity terms.
GDP is also affected by inflation. Due to its value of both goods and services, the Gross
Domestic Product can be affected by inflation. The rising prices of goods and services rapidly
increase the GDP of an economy but do not depict any alterations on the quality or quantity of
production. Therefore, the nominal GDP of an economy cannot determine whether the rise
results from an increase in prices or a real increase in production. To arrive at the total GDP,
economists use processes that make inflation adjustments (Henderson, 3). This way, it becomes
easier to compare GDPs from year to year determining whether there is real growth.
Real Gross Domestic Product, on the other hand, is computed using a price deflator. It is
derived from the difference in price between the current year and the given base year. If there is
a rise in price by 8% from the given base year, then the price deflator will be 1.08%. In this case
nominal GDP will then divided using price deflator, ultimately getting the real gross domestic
product. The nominal GDP is always a slightly higher number since it takes account of inflation,
while inflation on the other hand is positive. Real gross domestic product considers the changes
in the price of goods in the market, thereby narrowing Output between years (Henderson, 5). A
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massive difference between the real and the nominal GDP of a country indicates a significant
deflation or inflation.
Nominal gross domestic product compares different areas of Output within the same
year. While making a comparison in a number of years, real gross domestic product, in this case,
will be used. To give a clear picture of the economic performance, the real gross domestic
product is the best method. Suppose a country had a nominal gross domestic product of 200
billion dollars in the year 2009. By the year 2019, the country's GDP had grown by 50 billion
dollars to attain a nominal GDP of 250 billion dollars (Henderson, 3). In the same period, prices
increased by 100%. If we take to consideration the nominal GDP alone, then the said economy
looks like it is doing relatively well. However, in real sense, the real gross domestic product
stands at 75 billion dollars, which means there is an overall decrease in the economy's
performance.
GDP can as well be calculated using three methods, which will give a similar figure if
done correctly. The processes include; the Output or production method, the income method, and
the expenditure method. The expenditure method, which is also known as the spending method,
gets the spending of the various groups accounted for in the country (Henderson, 4). It is
computed using the equation: Gross Domestic Product = C + G + I + N.X. (where C is
Consumption, G is government expenditure, I is investment, and N.X. is the net export).
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The Output or the production method computes the production costs, this method gets the
total value of the economic Output, then subtracts the cost of goods used within that process.
Whereas the expenditure hope takes a forecast from prices, this output approach projects
backward (Henderson, 4). The income method h, on the other hand, gets an equilibrium point
between the other two methods. It computes the income earned from all production factors in an
economy, labor wages, the land rent, and corporate profits.
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IMPACTS OF COVID-19 ON THE UNEMPLOYMENT RATE IN THE USA.
Unemployment in macroeconomics is highly regarded as a critical indicator of an
economy's performance and the labor market of a country. As vital economic indicator, the
unemployment rate attracts media and financial organizations worldwide, especially in recession,
pandemics, and generally straining economic times. This kind of attention is large because
unemployment rates affect jobless individuals and have a broad impact on a nation's economy
(Molla, 3). Unemployment is a great way that affects households' disposable income, erodes the
purchasing power, diminishes employees' morale, and adversely reduces the Output of an
economy. Below is an illustration of the cost of unemployment.
The coronavirus pandemic has had adverse effects on the economies of many countries.
For instance, in the United States of America, the disease's spread has mainly led to the closure
of nonessential businesses, which has had a remarkable effect on the economy. Close to 17
million people have claimed their unemployment insurance over the last month of the pandemic.
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This suggests that the U.S.'s unemployment rate is roughly above 15 percent (George et al., 2).
This is the status of unemployment is high above the rate at the peak of the great recession. The
measure taken to minimize the spread of the pandemic, such as lockdown, played a significant
role in increasing the unemployment rate.
The closure of industries in the U.S. due to the pandemic meant both losses of jobs and
loss of any earnings to those who were earlier employed. Unemployment is a significant
determinant of poverty in the United States of America. Prolonged periods of unemployment,
primarily through the pandemic, pushed many households into debt (Molla, 6). Due to the low-
income levels during the epidemic, many families in the united states operated above the budget
line, meaning they had to borrow money for their household needs, leading them into debt and
eventually subjecting them into poverty.
Coronavirus has had significant effects on the National GDP of the U.S. Several
industries and sectors have been relatively affected by the economy's shutdown. Some sectors
require more labor than others, meaning the labor requirements to produce the same Output for
some industries is higher than others (George et al., 1). Therefore, the unemployment rate is
higher or lower if the gross domestic product comes from a decrease comes from more or less
labor-intensive sectors. In the illustration below, the blue line and the red line estimate the
unemployment rates subject to the decline in the gross domestic product. The blue line assumes a
reduction in GDP progressing from the sector that requires more labor to the industry that
requires less labor. The red line takes the opposite.
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The levels of unemployment due to the pandemic have led to an increase in the
government borrowing. High unemployment levels have significantly led to a fall in tax revenue
since fewer people pay income tax and a significant decrease in spending, hence lower value-
added tax. On the other hand, the government is forced to spend more on unemployment and
other related benefits to cover the low tax revenue gap (George et al., 2). To do so, the
government has to get grants and loans to cover the gap, which leads to a fiscal deficit.
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IMPACTS OF INFLATION ON AN ECONOMY
Inflation entails a significant decrease in a currency's purchasing power due to a price
increase of goods and services across an economy. The average cost of a cup of coffee two years
ago, for instance, was a dime. Currently, the average cost of the same cup of coffee is close to
two dollars. There are several possible reasons why the rapid increase in the price of the coffee
(Nipun,7). One could be that there has been a significant increase in the popularity of the coffee
increasing its demand significantly, a pooling in prices by coffee producers’ cartels, or years of
prolonged floods or drought in major coffee-growing areas, which in turn causes the low market
supply of coffee hence increase in prices. However, this would not be the best example to
explain inflation since inflation requires a price increase in various goods and services. In this
case, to determine inflation, the consumer price index is of utmost importance.
Inflation encourages investing and spending. The best response to a currency's declining
purchasing power is buying goods and services now than buying later when the money has a
lower value. For consumers, that means buying household goods in bulk and stocking up, while
for businesses, that means getting into capital investments that can be postponed. In such cases,
investors buy gold, and other precious metals such as silver and diamond, which they can hold
until the currency's purchasing power is restored (Nipun 5). Equities, on the other hand, have
also been part of the ways to deal with inflation.
Spending and investing in the wake of inflation could also lead to a more significant
increase in inflation. As investors and individuals spend faster in a bid to reduce the time they
hold their value-depreciating currency, the economy floods with money that no one wants to own
(Nipun 4). The supply of money in the economy becomes more than its demand, leading to a
price decrease of the money or, in other words, the currency's purchasing power falls drastically.
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When the situation worsens, businesses and households that opt to stock up rather than hold
depreciating cash get into hoarding, leading to empty stores and groceries.
Inflation significantly reduces inflation, as explained by the Phillips curve (Mayland, 1).
The curve depicts that in the short-run, an inverse relationship between rates of inflation
and unemployment rates. As the rate of inflation increases, unemployment, on the other hand,
decreases significantly. In the illustration above, an economy can experience a 3%
unemployment rate at the cost of 6% of inflation or still increase unemployment levels to 5% and
bring down the levels of inflation to 2%. In the long-run, the curve is a vertical line showing
there is no permanent relationship between unemployment and inflation in the long-run.
However, the curve is still L-shaped in the short-run to establish the inverse relationship between
the variables. As the unemployment rate increases, the inflation rate decreases, and as
unemployment declines, inflation rates increase. The figure below illustrates the relationship
between inflation and unemployment in the long-run.
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Long-run Phillips Curve.
Inflation as well increases the cost of borrowing. Countries have a great incentive to
monitor the rise in prices. The U.S., for example, in the past century, has used monetary policy to
manage the levels of inflation in its economy (Mayland, 1). The Federal Reserve, which is the
U.S. Central bank, has been able to do so by relying on the relationship between interest rates
and inflation. In cases where interest rates are low, individuals and companies can cheaply
borrow to kick start a business, hire, expand a business, etc. in other words, lower rates highly
encourage investing and spending, which in turn stoke inflation.
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Works Cited
George, Annelies Goger, Tracy Hadden Loh, and Caroline. “Unemployment Insurance Is Failing
Workers during COVID-19. Here’s How to Strengthen It.” Brookings, 6 Apr. 2020,
www.brookings.edu/research/unemployment-insurance-is-failing-workers-during-covid-19-
heres-how-to-strengthen-it/.
Henderson, Dean. “Lesson Summary: The Balance of Payments (Article).” Khan Academy, 2012,
www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-open-economy-
international-trade-and-finance/the-balance-of-payments/a/the-balance-of-payments.
Mayland, Jenkins. "Phillips Curve – Fiscal Policy | Economics Online." Economicsonline.co.uk, 2017,
www.economicsonline.co.uk/Global_economics/Phillips_curve.html.
Molla, Rani. "How Coronavirus Has Changed U.S. Employment, in 6 Charts." Vox, 3 Apr. 2020,
www.vox.com/recode/2020/4/3/21203199/state-of-employment-charts-unemployment-rate-
claims-hiring-work-from-home.
S, Nipun. “Top 6 Effects of Inflation | Economy.” Economics Discussion, 13 Jan. 2017,
www.economicsdiscussion.net/inflation/top-6-effects-of-inflation-economy/26075.