Economics Assignment

Answer 1:

GDP or the Gross Domestic Product is the value of total goods and services produced by an economy within its geographic boundary within a specific period of time (Konchitchki and Patatoukas 2014). GDP is measured through three methods, which are the Output method, Expenditure method, and the Income method (Munda 2015). The output method measures the market value of the total goods and services produced in an economy within its geographical border (Dobija 2015). On the other hand, total expenditure measures the total expenditure incurred by the economy on the goods and services within the geographical boundary of the economy. The income method measures the total income earned by the laborers and capital within the economy (Trinh 2017). GDP is one of the basic indicators of the human development index, however, there are various flaws in the measurement too.
GDP does not incorporate leisure time into its analysis that constraints the researcher to measure the well-being level of the economy
Secondly, GDP fails to depict the wealth distribution of the nation. If the wealth distribution is biased, then it cannot be reflected through the GDP and fails miserably to calculate the HDI of the economy.

Figure 1 depicts the HDI trend of a developed nation and of a developing nation. In this case, Australia has been chosen as the developed nation and India has been chosen as the developing nation. Considering the trend of the HDI of both the nation, it can be stated that Australia is well ahead compared to India, in terms of HDI index. From 1990 to 2000, India has faced a sharp rise in its HDI, whereas Australia has faced a slower change in the HDI during the same period. Post-2010, both the nation has been facing a slow rise in the HDI, however, the rate of change of HDI for India is higher than Australia. With 0.900 HDI, Australian people lives a better life compared to the Indian, whereas the Indian people lives a fair life, though the development in the country is not that high as of Australia (Çilingirtürk and Koçak 2017)

Answer 2:

The criterion used by the firms to discuss the investment expenditure varies depending upon the objective of the investment opportunity in front of the firm. In the case of the investment expenditure, that enhances safety, reduces pollution, and related to maintenance while complying with the regulation gets approved without quantitative evaluation. However, discretionary investment expenditure is subject to evolution whose magnitude depends upon the size of the investment, the manager’s attitude towards risk, and perceived riskiness. Considering this, it can be stated that, when it comes to the criterion used by the firm while undertaking investment expenditure is Discounted Cash Flow and Payback period (Boardman et al. 2017).
Discounted cash flow is the general method recommended by the finance theory in order to evaluate the investment decision based on the Net Present Value (NPV) (Damodaran 2016). According to this, investment expenditure should be framed considering the sum of all Cash Flows sourced from the investment utilizing the chosen discount rate by the firm. In general, if the NPV is positive, then it is good to invest in the project.
Next to this, there is a payback period, where the firm evaluates the investment decision using the payback period, which is basically the number of the year, within which capital outlay to be returned through the generated cash flow of the project (Abor 2017).
In addition to this, companies take Gross fixed Capital Formation as another method of investment expenditure. Utilizing the Production Possibility Frontier (PPF) determines the investment expenditure.

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