UNIVERSITY OF MODERN SCIENCES

College of Business

Fundamentals of Economics
ECON 102
FALL SEMESTER 2015-16
ASSIGNMENT-1
Sumitted by
Husain Alhashmi
201321090
Section 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 countrys
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

countrys 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,

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,

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

NI=NNP+Subsidies-Interest Taxes
or,GNP-Depreciation+SubsidiesIndirect Taxes
or,NI=C+G+I+(X-M)+NFIADepreciation-Indirect
Taxes+Subsidies

Real GDP vs. Nominal GDP

Definiti
on

Nominal GDP

Real GDP

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

When wages are measured at

constant prices. Real wages are
denoted by w
w = W/P

W= P.w

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.

The consumer price index (CPI) is a

measure of the overall cost of the
goods and services bought by a
typical consumer.

Per capita income is often used as a

measure of the wealth of the
population of a nation, particularly in

The Bureau of Labor Statistics reports

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

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.

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 whats
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 dont raise prices frequently and dont 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 dont 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

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

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

Labor Force Participation Rate (%)

LFP

Labour Force
100
Adult Population

LFP = (155.5/245.9) 100 = 63.24%

Rate