Fundamentals Of Economics Questions - Assignment Example

UNIVERSITY OF MODERN SCIENCES College of Business FALL SEMESTER 2015-16 ASSIGNMENT-1 Course Name: Fundamentals of Economics Course Code: ECON 102 Assessment: Assignment ECON 102 Submission Date: October 31, 2015 Student Name: Naser Ghanem Alhameli Student ID: 201330021 Section { 3 } Total Marks: 40 Weightage: 10% Course Learning Outcomes (CLOs) Coverage: CLOs K1 S2 C3 Max Marks 15 15 10 Awarded INSTRUCTIONS TO THE CANDIDATES: This is individual assessment. Group work is not allowed. In mentioned cases provide a neat diagram to explain your answer. Make sure to label axes properly. Else points will be deducted PLEASE SUBMIT the Assignment through STUDENT PORTAL Assignments submitted through Student Portal will be marked ONLY The Assignments submitted after DUE DATE will not be ENTERTAINED Question-1: Differentiate the followings; (2 x 5 = 10 marks) i. Gross Domestic Product (GDP) Vs Gross National Product (GNP) Both GDP and GNP are used in measuring the size and strength of a country’s economy. However, they differ in a number of respects as explained below. GDP (Gross national product) refers to the estimated value of the country’s production total worth. In this case, the country’s production refers to production of both goods and services produced within the country’s boundaries within the course of one year’s period by both the country’s nationals and foreigners living in the country. On the other hand, GNP (Gross national product) refers to the estimated value of the total worth of production of goods and services by citizens of a country on its land or on foreign land and is calculated within over a one year’s period. GDP is used in assessing the strength of a country’s local economy while GNP is used in gauging how the citizens of a given country are performing economically. ii. Net National Product (NNP) Vs National Income (NI) NNP (Net national product) is defined as the gross national product less capital consumption allowances. In other words, NNP is the monetary value of finished goods and services produced by a country’s citizens whether resident or overseas within a year’s time (GDP) less the amount of GNP that is required in purchasing new goods to maintain existing stock. It is calculated as the total payroll compensation; add net indirect tax on current production and operating surpluses. On the other hand, national income is the net national product less indirect business taxes. In other words, it is the total value of all goods and services produced within a given nation over one year period and it represents the sum of profits, wages, interest, rent as well as pension payments to the nation’s residents. iii. Real GDP Vs Nominal GDP Real GDP differ from Nominal GDP in that nominal GDP is the market or monetary value of all final goods and services that are produced in a country within a given period say one year while real GDP is the measure of the total value of the output of a country’s economy adjusted for price changes. In other words, nominal GDP and real GDP differ in that real GDP has been adjusted for inflation while nominal GDP has not been adjusted for inflation. iv. Real Wages Vs. Nominal Wages While Nominal wage is the wage measured in monetary basis, the real wage is nominal wage in a given economy adjusted for changes in purchasing power. In other words, real wages can be referred to as nominal wages adjusted for inflation. v. Per Capita Income (PCI) Vs Consumer Price Index (CPI) Per capita income is defined as the average income earned per person in a given are usually a country though it could be a city or a region. Per capita income is arrived at by dividing the area’s (e.g. country’s ) total income within a given year with its total population. On the other hand, consumer price index measures changes in the purchasing power of a currency given the rate of inflation (Barrows and Smith, 2015). CPI expresses the current prices of a basket of goods and services in terms of the prices during the same period in the previous year with an aim of showing the effect of inflation on consumer’s purchasing power. Question-2: (10 marks) Components of GDP (Value in US$ billions) Consumption: 11150 Durable Goods 1203 Non-durable Goods 2567 Services 7380 Investment: 2475 Business Fixed Investment 1970 Residential Investment 439 Change in Business Inventories 66 Government Purchases: 3167 Federal Level 1296 State and Local level 1871 Net Exports: -547 Feral Level 2196 State and Local level 2743 Net Foreign Factor Income: 500 Depreciation Allowances: 245 By Using macroeconomics data given in the above table; Formulate GDP Equation and calculate the followings: i. Gross Domestic Product (GDP) GDP = C+G+I+(X-M) Where: C represents household consumption of goods and services G represents government spending I refer to gross private investments (X-M) refers to the net exports Thus, GDP in this case is calculates as follows; Consumption (C) Durable goods $1,203 Non-durable goods $2,567 Services $7,380 Total household consumption (C) $11,150 Add Government purchases (G) Federal level $1,296 State and local level $1,871 Total Government purchases (G) $3,167 Private investments (I) Business Fixed Investment $1,970 Residential Investment $439 Change in Business Inventories $66 Private investments (I) $2,475 Net exports (X-M) Feral Level $2,196 State and Local level $2,743 Net exports (X-M) $-547 Gross domestic product (GDP) $16,245 ii. Gross National Product (GNP) GNP = C+G+I+(X-M) + NF Where: C represents household consumption of goods and services G represents government spending I refer to gross private investments (X-M) refers to the net exports NF refers to Net Foreign Factor Income The GNP is calculated as follows: GNP = $11,150+ $3,167 + $2,475 + $-547 + 500 = $16,745 iii. Net National Product (NNP) NNP = GNP – depreciation allowances = $16,745- $245 NNP=$16,500 Question-3: (a) What is GDP deflator and how is it calculated? (5 marks) GDP deflator refers to the measure of the level of prices of all new final goods and services produced domestically in an economy. It measures price changes in the current year in comparison to those of a base year for all goods and services produced within the country and it converts nominal GDP to real GDP which is also GDP at constant prices. GDP deflator is calculated by dividing the nominal GDP with real GDP. GDP deflator = (Nominal GDP/ Real GDP)*100 It can also be calculated by dividing the current prices by the base year prices. GDP deflator = Current price/ Base year price (b) If GDP deflator for the year 2013 and 2014 are 105 and 108 respectively, then calculate the increase in price level between 2013 and 2014. The increase in Prices is given by GDP deflator current year less GDP deflator base year =2014 GDP deflator less 2015 GDP deflator = 108-103 =$3 Price increase = $3 Question-4: Define inflation and what are different costs of inflation? Explain the role played by country’s Central Bank in controlling inflation. (5 marks) Simply put, inflation is a sustained increase in the general price levels for goods and services. The main macroeconomic goal or most developed economies is achieving low inflation levels owing to the many costs associated with high inflation (Boyes and Melvin, 2014). The costs include; i) Reduced international competitiveness –High inflation makes a country’s goods less competitive which leads to falling exports. This leads to the nation’s competitiveness. ii) Confusion and certainty – high levels of inflation makes people uncertain regarding what to spend their money on. Firms are also less willing to invest owing to uncertainty about future costs and profits. This is likely to lead to lower rates of economic growth in the long run. iii) Boom and bust economic cycles – high inflationary growth is not sustainable and is usually followed by recession. On the other hand, low inflation levels enable long periods of economic growth. iv) Menu costs – they are the costs of changing price lists. Constant changing of price lists owing to high levels of inflation incurs costs though advancement in technology has greatly helped overcome this challenge. v) Shoe leather costs – During high inflation, people tend to hold less cash in a bid to save on losing interest rates implying that they visit the banks more frequently. vi) Income redistribution – rising inflation makes borrowers better off while lenders become worse off. The value of savings is reduced though this depends on real rate of interest. vii) Cost of reducing inflation – lowering inflation involves taking such steps as raising interest rates hence reducing spending and investments (Robert, 2014). The reduction in aggregate demand leads to declining economic growth while giving rise to unemployment. viii) Fiscal drag – when inflation increases, taxes increase since with rising wages more people slip into the income tax bracket. Question-5: Briefly explain the different types of Unemployment? (10 marks) The different types of unemployment include; i) Structural unemployment – this is unemployment resulting from structural problems within the economy as well as the inefficiencies of the labour market. ii) Frictional unemployment – this refers to the time period between jobs when a worker is searching for or transiting from one job to the other. iii) Cyclical unemployment – this type of unemployment results from inadequate aggregate demand within the economy to provide enough jobs for everyone to work. iv) Classical unemployment- This type of unemployment results when real wages for a job are set above the market clearing level. v) Natural unemployment – Natural unemployment rate is the hypothetical rate of unemployment which is consistent with aggregate production being at long run level. (a) What is relationship between inflation and unemployment? ix) As stated above, the steps taken in reducing inflation include raising interest rates hence reducing spending and investments. The reduction in aggregate demand leads to declining economic growth while giving rise to unemployment. In addition, the relationship between inflation and unemployment can also be seen in that as unemployment continues falling, workers also increasingly get empowered and hence push for higher wages. When firms award these wages, they try passing the higher wage costs to consumers which in turn result in higher prices and hence an inflationary build up in the economy. This then triggers the rising of interest rates in a bid to arrest the inflation situation (Robert, 2011). This reduces spending and investments. The reduction in aggregate demand leads to declining economic growth while giving rise to unemployment and the cycle continues. (b) A country has 245.9 million of working-age population, out of which 155.5 million are in labor force. From total labor force, 144.2 million are employed and 11.3 million are unemployed. Calculate Unemployment Rate and Labor Force Participation Rate? Unemployment rate = Unemployed / (Employed +Unemployed) Unemployed = 101.7 million Thus, Unemployment rate = (101.7/245.9)*100% = 41.36% Labour force participation rate = (Civilian labor force/ Total non-institutionalized civilian population) = (144.2/155.5)*100% =92.73% References: Barrows, D&, Smith, J2015, Fundamentals of economics for business, New York, Taylor & Francis. Boyes, W&, Melvin, M2014, Fundamentals of economics, New York, Cengage learning. Robert, A2014, Strategic financial management, London, Rutledge. Robert, B2011, Principles of economics, New York, Tailor & Francis. Good Luck! Read More