UNIVERSITY OF MODERN SCIENCESCollege of Business

Fundamentals of EconomicsECON 102

FALL SEMESTER 2015-16

ASSIGNMENT-1

Sumitted byHusain Alhashmi

201321090Section 1

Answer-1: Gross Domestic Product (GDP) Vs. Gross National Product (GNP)

GDP GNP

Stands for Gross Domestic Product Gross National Product

Definition An estimated value of the total worth of a country’s production and services, within its boundary, by its nationals and foreigners, calculated over the course on one year.

An estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land, calculated over the course on one year.

Formula for Calculation

GDP = consumption + investment + (government spending) + (exports − imports).

GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets).

Uses Business, Economic Forecasting. Business, Economic Forecasting.

Application (Context in which these terms are used)

To see the strength of a country’s local economy.

To see how the nationals of a country are doing economically.

Layman Usage Total value of products & Services produced within the territorial boundary of a country.

Total value of Goods and Services produced by all nationals of a country (whether within or outside the country).

Net National Product (NNP) Vs. National Income (NI)

Net National Product (NNP) National Income (NI)

Net National Product is the market value of all final goods and services after allowing for depreciation. It is also called National Income at market price. When charges for depreciation are deducted from the gross national product, we get it. Thus,

NNP=GNP-Depreciation

or, NNP=C+I+G+(X-M)+NFIA-Depreciation

National Income is also known as National Income at factor cost. National income at factor cost means the sum of all incomes earned by resources suppliers for their contribution of land, labor, capital and organizational ability which go into the years net production. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income. Symbolically,

NI=NNP+Subsidies-Interest Taxes

or,GNP-Depreciation+Subsidies-Indirect Taxes

or,NI=C+G+I+(X-M)+NFIA-Depreciation-Indirect Taxes+Subsidies

Real GDP vs. Nominal GDP

Nominal GDP Real GDP

Definition Nominal GDP is the market value (money-value) of all final goods and services produced in a geographical region, usually a country.

Real GDP is a macroeconomic measure of the value of output economy, adjusted for price changes. The adjustment transforms the nominal GDP into an index for quantity of total output.

Y = P× y, where P is the price level and y is real output

y =Y/P where P is price level

Real Wages Vs Nominal Wages

Nominal Wages Real Wages

When wages are measured at current prices. Nominal wages are also known as money wages and denoted by W

W= P.w

When wages are measured at constant prices. Real wages are denoted by w

w = W/P

Per Capita Income (PCI) Vs Consumer Price Index (CPI)

Per Capita Income (PCI) Consumer Price Index (CPI)

Per capita income, also known as income per person, is the mean income of the people in an economic unit such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or Gross national income) and dividing it by the total population.

Per capita income is often used as a measure of the wealth of the population of a nation, particularly in comparison to other nations. It is usually expressed in terms of a commonly used international currency such as the Euro or United States dollar, and is useful because it is widely known, easily calculated from readily-available GDP and population estimates, and produces a straightforward statistic for comparison.

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer.

The Bureau of Labor Statistics reports the CPI each month.

It is used to monitor changes in the cost of living over time.

Answer-2:Gross Domestic Product (GDP)

C=Consumption= 11,150

I=Investment=2,475

G=Government Purchases=3,167

NX=Net Exports= -547

GDP = Y = C + I + G + NX

GDP = 11,150+2,475+3,167-547

GDP = 16,245

Gross National Product (GNP)

NFFI = Net Foreign Factor Income = 500

GNP= GDP + NFFI

GNP= 16,245 + 500

GNP= 16,745

Net National Product (NNP)

Depreciation Allowances = 245

NNP = GNP – Depreciation

NNP = 16,745 – 245

NNP = 16,500

Answer-3:GDP deflator

GDP deflator (implicit price deflator) is a measure of the level of prices of all new, domestically

produced, final goods and services in an economy. GDP stands for gross domestic product, the

total value of all final goods and services produced within that economy during a specified

period.

The GDP deflator, also called the implicit price deflator for GDP, measures the price of output

relative to its price in the base year. It reflects what’s happening to the overall level of prices in

the economy

GDP deflator measures the ratio of nominal GDP to the real measure of GDP. The formula used

to calculate the deflator is:

GDP deflator 2013 = 105

GDP deflator 2014 = 108

The increase in price level between 2013 and 2014 = 105/108 = 0.97

Answer-4:Definition of inflation

Inflation is a key concept in macroeconomics, and a major concern for government

policymakers, companies, workers and investors. Inflation refers to a broad increase in prices

across many goods and services in an economy over a sustained period of time. Conversely,

inflation can also be thought of as the erosion in value of an economy's currency (a unit of

currency buys fewer goods and services than in prior periods).

Different costs of inflation

1. Menu costs

This is the cost of changing price lists. When inflation is high, prices need

changing frequently which incurs a cost. However, modern technology has

helped to reduce this cost.

2. Shoe leather costs

To save on losing interest in a bank people will hold less cash and make more

trips to the bank.

3. Confusion and uncertainty

When inflation is high people are uncertain what to spend their money on. Also,

when inflation is high firms may be less willing to invest because they are

uncertain about future profits and costs. This uncertainty and confusion can lead

to lower rates of economic growth over the long term. This is one of the main

concerns about high inflation rates.

4. Misallocation of resources from relative-price variability

Firms don’t raise prices frequently and don’t all raise prices at the same time, so

relative prices can vary which distorts the allocation of resources.

5. Tax distortions

Inflation makes nominal income grow faster than real income.

Taxes are based on nominal income, and some are not adjusted for inflation. So,

inflation causes people to pay more taxes even when their real incomes don’t

increase.

Role of Central Bank in controlling inflation

The central bank must regulate the level of inflation by controlling money supplies by means of

monetary policy. The central bank performs open market transactions that either inject the

market with liquidity or absorb extra funds, directly affecting the level of inflation. To increase

the amount of money in circulation and decrease the interest rate (cost) for borrowing, the

central bank can buy government bonds, bills, or other government-issued notes. This buying

can, however, also lead to higher inflation. When it needs to absorb money to reduce inflation,

the central bank will sell government bonds on the open market, which increases the interest

rate and discourages borrowing. Open market operations are the key means by which a central

bank controls inflation, money supply, and price stability.

Answer-5:Types of Unemployment

1. Seasonal unemployment

Seasonal unemployment is unemployment due to seasonal changes in

employment or labour supply.

Examples include students employed during the summer at Mackinaw Island in

northern Michigan, employment in the construction industry, and people

employed at Cedar Point Amusement Park in Ohio.

2. Frictional unemployment

Frictional unemployment is a brief period of unemployment experienced by

people moving between jobs or into the labour market. People have the skills

and knowledge necessary to get a job, and the jobs are available.

Examples of frictionally unemployed people include new college graduates and

people quitting a job and looking for something different or better.

3. Structural unemployment

Structural unemployment is unemployment caused by a mismatch between the

skills or location of job seekers and the requirements or location of available

jobs.

Jobs may be available in other geographic areas or for individuals with specific

skills and abilities.

Examples include laid off steelworkers in the 1980s and defence contractors in

the 1990s. Also teenagers and others with a lack of job skills are included.

4. Cyclical unemployment

Cyclical unemployment is unemployment caused by a lack of job vacancies; an

inadequate level of aggregate demand.

Cyclical unemployment commonly occurs during recessions. Companies cut back

on workers due to reduced sales, fears of an economic recession, and insufficient

consumer demand.

The relationship between inflation and unemployment

If unemployment rates are low, inflation should occur. Because consumers would be earning

and later using that income to purchase goods and services, when too much spending is

happening in an economy, inflation is inevitable. If unemployment rate is high, spending is

down, people can't afford to be enough due to lack of money. Therefore more jobs are layed off

and inflation is thought to come down. Because of less spending in the economy

The Phillips curve shows the inverse relationship between inflation and unemployment: as

unemployment decreases, inflation increases

100PopulationAdult

ForceLabour

The Phillips curve relates the rate of inflation with the rate of unemployment. The Phillips curve

argues that unemployment and inflation are inversely related: as levels of unemployment

decrease, inflation increases. The relationship, however, is not linear. Graphically, the short-run

Phillips curve traces an l-shape when the unemployment rate is on the x-axis and the inflation

rate is on the y-axis.

Unemployment Rate (%)

Unemployment Rate

Unemployment Rate = (11.3/155.5) ×100 = 7.27%

Labor Force Participation Rate (%)

LFP

LFP = (155.5/245.9) ×100 = 63.24%