Name: Nayama ID: AIU20092072
Tutorial 1
1. What is the different between Microeconomic and Macroeconomics?
ANSWER:
Microeconomics is the study of particular markets, and segments of the
economy. It looks at issues such as consumer behavior, individual labor markets,
and the theory of firms.
Macroeconomics is the study of the whole economy. It looks at ‘aggregate’
variables, such as aggregate demand, national output and inflation.
Microeconomics Macroeconomics
Individual markets Whole economy
Effect on price of good Inflation (general price level)
Individual labor market Employment/unemployment
Individual consumer behavior Aggregate demand
Supply of good Productive capacity of economy
2. Discuss about the component of the Macroeconomics in an open economy.
ANSWER:
An open economy is a type of economy where not only domestic actors but also
entities in other countries engage in trade of products (goods and services).
Trade can take the form of managerial exchange, technology transfers, and all
kinds of goods and services. (However, certain exceptions exist that cannot be
exchanged; the railway services of a country, for example, cannot be traded with
another country to avail the service.) It contrasts with a closed economy in which
international trade and finance cannot take place.
The act of selling goods or services to a foreign country is called exporting. The
act of buying goods or services from a foreign country is called importing.
Exporting and importing are collectively called international trade.
There are a number of economic advantages for citizens of a country with an
open economy. A primary advantage is that the citizen consumers have a much
larger variety of goods and services from which to choose. Additionally,
consumers have an opportunity to invest their savings outside the country. There
are also economic disadvantages of an open economy. Open economies are
interdependent on others and this exposes them to certain unavoidable risks.
Y = C + I + G + NX (Export – Import)
This is the formula of macroeconomics in open economy, Y is the national
income, C is the total consumption (Households), I is the total investment
(Private Sector/Firms), G is the total government expenditure (Public
Sector/Government), and NX is the net export (International sector) of the
country’s international trade. It can be surplus or deficit.
3. What is the difference between gross domestic product (GDP) and gross
national product (GNP)?
ANSWER:
GDP (Gross Domestic Product) is a measure of (national income = national
output = national expenditure) produced in a particular country.
GNP (Gross National Product) = GDP + net property income from abroad. This
net income from abroad includes dividends, interest and profit.
The difference between gross domestic product (GDP) and gross national
product
(GNP):
GDP GNP
Value of national output produced in a GNP= GDP + Net property income from
country. abroad.
National income
National output
National expenditure
Includes income of foreign multinationals. Excludes income earnt by multinational
when profit is sent back to other country.
4. Define net export. Explain how the export and import affect domestic
production.
ANSWER:
Net exports refers to a situation where the value of a country's total exports are
less than the value of its total imports (Net exports = total exports - total imports).
In today’s global economy, consumers are used to seeing products from every
corner of the world in their local grocery stores and retail shops. These overseas
products—or imports—provide more choices to consumers. Moreover, because
they are usually manufactured more cheaply than any domestically produced
equivalent, imports help consumers manage their strained household budgets.
The effects of importing and exporting are following:
A country's importing and exporting activity can influence its GDP, its
exchange rate, and its level of inflation and interest rates.
A rising level of imports and a growing trade deficit can have a negative
effect on a country's exchange rate.
A weaker domestic currency stimulates exports and makes imports more
expensive; conversely, a strong domestic currency hampers exports and
makes imports cheaper.
Higher inflation can also affect exports by having a direct impact on input
costs such as materials and labor.
When a country is importing goods, this represents an outflow of funds from that
country. Local companies are the importers and they make payments to
overseas entities, or the exporters. A high level of imports indicates robust
domestic demand and a growing economy. If these imports are mainly productive
assets, such as machinery and equipment, this is even more favorable for a
country since productive assets will improve the economy's productivity over the
long run.
5. What is the amount of net export with given an export as $7billion and
import as $5 billion? Explain how net export a negative amount might be.
ANSWER:
Net exports = total exports - total imports
= $7 billion - $5 billion
= $ 2 billion
Net export will be in a negative amount when total imports are greater than total
exports.
6. Below is a list of domestic output and national income figures for a given
year. Al figures are in billions. The question that follow ask you to calculate
the major national income measures by the both expenditure and income
method.
Personal consumption expenditures $245
Net foreign factor income earned 4
Transfer payments 12
Rents 14
Consumption of fixed capital (depreciation) 27
Social security contributions 20
Interest 13
Proprietors’ income 33
Net export 11
Dividends 16
Compensations of employees 223
Indirect business taxes 18
Undistributed corporate profits 21
Personal Taxes 26
Corporate income taxes 19
Corporate profit 56
Government purchases 72
Net private domestic investment 33
Personal saving 20
A1 figures
ANSWER:
Expenditure Method:
GDP = Personal consumption expenditure + Net private domestic investment +
Depreciation +Government purchases + Net exports = 245+33+27+72+11= 388
NDP = GDP - Depreciation
= 388 - 27
= 361
Income Method:
GDP = Compensation of employees + Rent + Interest + Proprietor's Income +
Corporate Profit +
Indirect business tax + Net foreign factor income earned + Depreciation + Indirect taxes
= 223+ 14+13+33+56+18+4+27=388
NDP = GDP - Dep
= 388 - 27
= 361
8. Using the following national income accounting data, compute the major
national income measures by the both expenditure and income method. All
figures are in billions.
Compensation of employees $194.2
Export of good and services 17.8
Consumption of fixed capital (depreciation) 11.8
Government purchases of goods and services 59.4
Indirect business taxes 14.4
Net private domestic investment 52.1
Transfer payment 13.9
Import of goods and services 16.5
Personal Taxes 40.5
Net foreign factor income earned 2.2
Personal consumption expenditures 219.1
ANSWER:
Expenditure approach
GDP= Consumption of fixed capital (depreciation) + Net private domestic investment
+
Government purchases of goods and services + Exports - Imports
GDP= 11.8+52.1+59.4+17.8-16.5= $124.6 Billion
While for income method
National Income= C (Household Consumption) +G (Government Expenditures) + I
(Investment Expenses) +NX (Net Exports) =219.1+59.4+52.1+17.8 = $348.4 Billion
9. Suppose that in 2014 the total output in a single good economy was 7,000
buckets of chicken. Also suppose that in 2014 each bucket of chicken was
priced at $10. Finally, assume that in 2017 the price per bucket of chicken was
$16 and that 22,000 buckets were purchased. Calculated the real price index
for 2017 by using the 2014 as the base year.
ANSWER:
10. The following table shows nominal GDP and an appropriate price index for a
group of selected years. Compute real GDP. Indicate in each calculation whether
are inflation or deflation the nominal GDP data.
Year Nominal GDP, Price Index
Billion (2009-100)
2009 $527.4 22.19
2011 911.5 26.29
2013 2295.9 48.22
2015 4742.5 80.22
2017 8790.2 103.22
ANSWER:
2009 $527.4 22.19 (deflation) 527.4/0.2219 =
2376.74
2011 911.5 26.29 (deflation) 911.5/0.2629 =
3467.09
2013 2295.9 48.22 (deflation) 2295.9/0.4822 =
4761.30
2015 4742.5 80.22 (deflation) 4742.5/0.8022 =
5911.87
2017 8790.2 103.22 8790.2/1.0322 =
(inflation) 8515.99
When price index is < 100 then it would be deflation
When price index is >100 then it would be inflation
11. Consider a very simple economy that produce only four final goods and
services: apples, bagels, soap and a cellphone contract. Assume that the
base year is 2013. Use the information in the following table to calculate
nominal and real GDP for 2017 and 2013, as well as the percentage
change in real and in nominal GDP.
Product 2013 2017
Quantity Price Quantity Price
Apples 300 $1.00 350 $1.50
Bagels 100 $0.50 90 $0.80
Soap 50 $7.00 50 $6.00
Cellphone 5 $60.00 7 $70.00
contract
ANSWER:
Nominal GDP:
2013 = $1,000
2017 = $1,387
Real GDP:
2013 = $1,000
2017 = $1,165
Percentage change in Nominal GDP = 38.70%
Percentage change in real GDP = 16.50%
Explanation:
Nominal GDP = Sum of (Quantity x Price)
2013 Nominal GDP:
Nominal GDP = (Quantity of apples x price) + (Quantity of Bagels x price) + (Quantity of
soap x price) + (Quantity of cellphone contract x price)
= (300 x $1.00) + (100 x $0.50) + (50 x $7.00) + (5 x $60.00)
= $1,000
2017 Nominal GDP:
Nominal GDP = (Quantity of apples x price) + (Quantity of Bagels x price) + (Quantity of
soap x price) + (Quantity of cellphone contract x price)
= (350 x $1.50) + (90 x $0.80) + (50 x $6.00) + (7 x $70)
= $1,387
Real GDP = Sum of (quantity x Base price)
2013 Real GDP:
For 2013, the real GDP is the same as the nominal GDP since it is the base year
(quantity and price remain unchanged). Therefore, 2013 real GDP = $1,000
2017 Real GDP:
Real GDP = (Quantity of apples x Base year price) + (Quantity of Bagels x Base year
price) +
(Quantity of soap x Base year price) + (Quantity of cellphone contract x Base year price)
= (350 x $1.00) + (90 x $0.50) + (50 x $7.00) + (7 x $60)
= $1,165
Percentage change in Nominal GDP:
% Change = [(2017 Nominal GDP - 2013 Nominal GDP)/2013 Nominal GDP] *100
= [($1,387 - $1,000)/ $1,000] *100
= 38.70%
Percentage change in Real GDP:
% Change = [(2017 real GDP - 2013 real GDP)/2013 real] *100
= [($1,165 - $1,000)/ $1,000] *100
= 16.50%
12. Discussed the limitation for GDP concept.
ANSWER:
GDP measures the value of goods and services that are bought in markets, so it
excludes:
Household Production: Household production is productive activities at the home that
do not involve market transactions. As more services, such as childcare, meals and
laundry are provided in the marketplace, the measured growth rate overstates
development of all economic activity.
Underground Production: Underground production is the part of the economy that is
hidden from the view of the government either because people want to avoid taxes and
regulations or because the goods and services being produced are illegal. If the
underground economy is a reasonably stable proportion of all economic activity, the
growth rate will be accurate.
Leisure Time: Leisure time is an economic good that does not get measured in the
official GDP figures. Increases in leisure time lower the economic growth rate, but we
value our leisure time and we are better off with it. Increased output is not worth very
much if we have little or no time to enjoy it.
Environmental Quality: Pollution does not directly lower the economic growth rate. If
our standard of living is adversely affected by pollution, our GDP measure does not
show this fact. The reason is that the devices that we produce to mitigate pollution count
as part of GDP but the pollution itself is not subtracted.
