Estimation of Aggregate Demand and Supply

Question: Discuss about the Estimation of Aggregate Demand and Supply. Answer: Introduction This study is based on the subject of economics. During this assignment, mainly five different questions are answered. In the beginning, the discussion of the study is done on the reliability of real GDP in determining the standard of living of the people in the country. In the second question, the discussion is done on the unemployment and it is tried to identify the reasons for which a country cannot avoid unemployment. In the third question, a particular statement on the prices of goods and inflation is analyzed and in the fourth question, the discussion is made on the aggregate demand curve. The answer of fifth question states about the aggregate supply curve. In the words of Craig (2016), the real GDP of a country indicates the macro economic outputs that are identified by considering the changes in prices of products and services. This means, the real GDP of a country indicates the overall output generating capacity of the country in a particular year. However, many people have stated that real GDP is not a proper indicator of the standard of living of the people in a country. The main reason for which the real GDP of a country cannot be considered as the perfect measure of the standard of living of the people in the country is that the real GDP does not include many factors that affect the standard of living of the people (Succurro, 2016). For example, the earnings from the illegal activities, political and social influences, households activities and underground economic activities. The above-mentioned four factors are not considered while calculating the real GDP of the country. However, if it is analyzed properly, then it can be seen that the activities of households help the people improving their standard of living. Similarly, sometimes, many people earn money through the underground economic activities, which help the people improving their living standards. The term unemployment indicates unavailability of the employment opportunities. Unemployment generally arises in a country due to several reasons like, due to the introduction of new and advanced technologies or due to the internal conflicts within the organization. The unemployment, which is created due to the introduction of advanced and new technology, is known as structural unemployment (Lisi 2016). In present business or economic context, this type of unemployment is unavoidable. This is because presently, the level of competition in the markets is much high and the companies or the business organizations are bound to introduce new and advanced technologies. Due to the introduction of advanced technologies many people, who do not know the use of the technologies lose their job. However, in this context, the companies cannot stop the introduction of new technologies because they need to survive. Hence, due to this reason, the structural unemployment is unavoidable. On the other side, the unemployment that is created due to the internal conflicts or problems of the organizations is known as the frictional unemployment. Lehmann, Ledezma and Van der Linden (2016) noted that, in todays context, most of the business organizations employ the people from different cultural backgrounds. Due to this, differences take place among the employees within the organizations. This ultimately creates internal conflicts and problems in the organizations (Succurro, 2016). However, the companies in todays business scenario cannot avoid employing the people from different cultural backgrounds. Therefore, it can be said that frictional unemployment is unavoidable. Yes, if the average level of prices of the goods and services rises, the inflation in the economy also rises. The main reason behind this is if the price level of the goods and services in the country increases, then the real income of the people in the country automatically decreases (Hansen, 2016). People require spending more money for availing limited quantity of products. This indicates that if the prices of the goods and services increases, the spending of the people also increase, which positively influences the inflation in the country or economy. However, there are many other factors behind the increase of inflation in the economy (Lehmann, Ledezma Van der Linden, 2016). For example, if the cost of the firms in the economy increases, then the inflation rate in the economy also increases and this type of inflation is known as cost push inflation. On the other side, if there is full employment in the economy, then the inflation rate increases, which are known as demand pull inflation (Cheung et al., 2016). In macroeconomics, the curve which indicates the demand for all goods and services, which are produced in the economy, is considered as the aggregate demand curve. Abe, Inakura and Tonogi (2016) stated that the aggregate demand curve is the combined demand for the all goods and services in the economy (Chatterjee, 2016). An aggregate demand curve is always downward slopping. The main reasons behind the downward slope of aggregate demand curve are stated below: The first reason behind the downward sloping of aggregate demand curve is at the low price level of the goods and services in the economy, when the income level of the people is fixed, the demand for the goods and services always increases (Toutkoushian Paulsen, 2016). Moreover, if the price level of the goods and services in the economy decreases, the savings of the people increases. If the savings increases, then interests rate decreases and the purchasing power of the people increases. Hence, the demand in the market increases (Abe, Inakura Tonogi, 2016). On the other side, if the prices of the products and services in a particular economy decreases, then the products and services of that economy become more competitive. This actually increases the demand for the products and services in the foreign markets. Therefore, due to these three reasons, the aggregate demand curve is always downward sloping. The curve in macroeconomics that shows the relationship between the output and the price level of the products and services in the economy is known as the aggregate supply curve (Abe, Inakura Tonogi, 2016). In long run, the aggregate supply curve is vertical because in long-run, the output of firms in the economy is not directly or indirectly related with the price level of the goods and services. On the other side, short run aggregate supply curve is always upward sloping because in short run the supply curve is derived on the basis of nominal rate of wages, which in fixed in short run (Chatterjee, 2016). Due to this, the supply or production of the output depends on the price of the products and services. Due to this, with the increase in the prices of the products and services, the profits of the firms also increase and so the level of output also increases (Rao, 2016). Hence, with the increase in price level, the short run supply curve goes upward. Conclusion In this study, it has been identified that real GDP of a country is not the reliable indicator of the standard of living because it does not consider many factors like, household income and underground economy. On the other side, the rate of unemployment arises because of some unavoidable situations like, introduction of new technologies and internal conflicts in the firms. The study has also identified that with the increase in the prices of goods and services, the inflation rises. At the same time, the study has also found out the reasons for which aggregate demand curve is downward slopping and aggregate supply curve is upward slopping. Reference list: Abe, N., Inakura, N., Tonogi, A. (2016).Estimation of Aggregate Demand and Supply Shocks Using Commodity Transaction Data. Research Institute of Economy, Trade and Industry (RIETI). Chatterjee, D. (2016). A simple example for the teaching of demand theory: Aggregate demand estimation for onions in India.IIMB Management Review,28(1), 20-24. Cheung, L., Chow, K., Cheng, M., Ng, P. K. (2016). Inflation mechanism and monetary policy: perspectives from Hong Kong. Craig, L. A. (2016). Nutrition, the Biological Standard of Living, and Cliometrics.Handbook of Cliometrics, 113-130. Hansen, B. (2016).A Study in the Theory of Inflation. Routledge. Lehmann, E., Ledezma, P. L. M., Van der Linden, B. (2016). Workforce location and equilibrium unemployment in a duocentric economy with matching frictions.Journal of Urban Economics,91, 26-44. Lisi, G. (2016). Unemployment, underground economy and economic growth in a matching model of behavioural economics.International Review of Economics, 1-12. Rao, B. B. (2016).Aggregate demand and supply: a critique of orthodox macroeconomic modelling. Springer. Succurro, M. (2016). Economic Performance. Toutkoushian, R. K., Paulsen, M. B. (2016). Demand and Supply in Higher Education. InEconomics of Higher Education(pp. 149-198). Springer Netherlands.