CRYSYAL BROOKS COLLEGE

THIRD TERM E - LEARNING NOTE

Subject : Economics

Week. Topic

1. DEMAND FOR AND SUPPLY OF MONEY

2. Theory of Money

3. Financial Institution

4. Inflation

5. Deflation

6. Capital Market

7. National Income

8. Theory of Income Development

9. Equation and Calculation of Income Determination

10. Theory of Multiplier

11. More Calculation on Theory of Multiplier

12. Revision

13. Examination

WEEK ONE

Topic: DEMAND FOR AND SUPPLY OF MONEY

CONTENT

1.The Supply of Money

2.The Demand for Money

3.The Value of Money and the Price Level

4.The Price Indice

5.The Quantity Theory of Money

The Supply of Money

The supply of money implies that entire stock of money in an economy and it consists of the bank notes,
coins and bank deposits. It is important to note that the above definition of money supply is like that
because of the existence of other assets that can be converted to cash. These are called “near monies”
since they can converted into currency as well even though at a cost.

The Demand for Money

The demand for money means the desire to hold money in liquid or cash form as against spending the
money. It is also the desire for money to serve as a medium of exchange and simultaneously serve as a
store of value.

Reasons and Motives Why People Demand for Money

The transaction motive: It is the desire to hold money for the everyday transactions that take place such
as paying transport fares and purchasing food items.

The precautionary motive: Money is held in order to meet thee needs arising from unplanned or
unforeseen circumstances such as sickness or accidents. It is often referred to as holding money for the
“rainy day”.

The speculative motive: This is the desire to hold money in order to meet future expectations such as for
investment purpose and expected fall in the prices of commodities.

EVALUATION

1.Define supply of money and demand for money?

2.State three reasons or motives why people demand for money

Sub topic: The Value of Money and the Price Level

The value of money refers to the quantity of goods or services that a sum of money can buy at a point in
time. The value of money is not state static as it changes from time to time with price as its indicator.
The value of money is equivalent to the amount of goods and services it can buy. When the price level
increases, a naira will buy less. If prices double, the value of money will be halved. The value or
purchasing power of money is inversely related to the level of prices. In other words, the value of money
refers to the purchasing power of money. It is measured through the use of an index number
Factors that Determine the Value of Money

1.General price level

2.The supply of money and its speed or velocity in circulation.

3.Inflation and deflation

4.Volume of production of goods and services

Measurement of the Value of Money

The value of money as well as the nation’s cost of living is measured by the use of price index, which is
also called index of retail prices.

Price index or Index number = Price in the current yearPrice in the previous year×1001

Example:

Assuming that price of a packet of biscuit was N30.00 in 2016 but rose to N40 in 2017.

Calculate the index number.

Solution

Index = Price index in 2017/Price index in 2016×1001

= 40/30×100/1=133.33

From the calculation, assuming the index of the base year is taken to be 100, it then means that the
index rose from 100 to 133.33. It equally means that the price of a packet of biscuit rose by 33.33
between 2016 and 2017. It can also be concluded from the above calculation that the money fell by
33.33 between 2016 to 2017. Thus, the cost of living rose in that period.

The Price Indices

The price indices can be defined as statistical methods used to measure the changes in the value of
money over time. It measures the real changes in the prices of certain groups of items.

Importance of Price Index

1.It can be used to determine how much a unit of money is worth over a particular period.

2.It can be used to determine the level of well being or the standard of living of the individual.

3.It can be employed by the government to determine the step to take concerning taxation.

Limitation of Price Index

1.The choice of commodities to use in the compilation of the indices

2.The choice of the appropriate base year

3.The possibility of change in the quality of the goods

4.Determining the right weight to use

5.Using price indices to measure the welfare of individual

WEEK 2

TOPIC : The Quantity Theory of Money

The quantity theory of money is defined as the relationship between the quantity of money in
circulation in an economy and the price level.

The quantity theory of money is one of the theories that try to explain what happens when there is an
imbalance between the demand for money (by households and firms) and the supply of money to these
economic units. The theory explains that if people hold more money than they require (i.e. if there is an
excess supply of money over demand), they will spend the surplus on currently produced goods and
services. This will increase the price level.

According to this theory, the value of money is determined not only by the supply of money (i.e. the
quantity of currency in circulation) but also by the rate at which money circulates and the quantity of
goods and services available.

It is shown in the following equation: MV = PT

Where

M = supply of money

V = velocity of circulation of money

P = price level

T = quantity of goods.

EVALUATION

1.State four factors that determine the value of money.

2.What is price index?

3.Explain any three importance and any three limitation of price index.

Assignment

Essential Economics

Research work.

WEEK 3

Topic :TYPES OF FINANCIAL INSTITUTIONS AND THEIR FUNCTIONS

CONTENT

1.Money Market

2.Capital Market

3.The Stock Exchange Market

Sub Topic : Money Market

Meaning of Money Market

Money Market: The market is a financial market for trading in short term financial assets. It consists of
individuals (and organizations) who wish to lend out money on a short term and those who wish to
borrow. It is therefore a market for short-term loans and investment.

Financial Institutions Which Operate in the Money Market

Financial institutions which operate in the money market include:

1.Central Bank

2.Commercial Bank

3.Acceptance House

4.Discount houses

5.Hire-purchase companies

6.Finance companies
Instruments Used in the Money Market

1.Treasury Bills

2.A bill of exchange

3.Treasury certificate

Functions or Advantages of the Money Market

1.Provision of circulating capital for commerce and industry

2.Offering investment opportunities on a short-term basis for people and organization to enable them
earn interest

3.Provision of investment advice to customer

4.Provision of opportunity for the public to participate in the management of the economy.

5.Mobilization of savings for investment.

Sub Topic: Capital Market

Meaning of Capital Market

This is a financial market for trading in long-term financial assets. It is a market for long-term loans and
investments. It consists of people and organization who wish to lend out money or to borrow on a long-
term basis.

The capital market can be divided into primary market and the secondary market. The primary market
deals with the buying and selling of new securities. It is dominated by merchant banks.

The secondary market is the market that deals with the buying and selling of old (second hand)
securities. It is dominated by the stock exchange.

Financial Institutions Which Operate in the Capital Market

1.Development banks

2.Insurance companies

3.Investment banks

4.Mortgage banks

5.The stock exchange

6.Issuing houses

7.Investment trust

8.Finance corporations

9.Savings banks

Instruments Used in the Capital Market are:

Shares

Development stocks

Government bonds

Company bonds

Functions or Advantages of Capital Market

1.Provision of capital for permanent long-term investments in industry and commerce

2.Provision of long-term investment opportunities for people and organization

3.Provision of managerial, technical and financial advice to investors

4.It encourages the growth of merchant banking

5.Provision of the opportunity for the public to participate in the running of the economy.

6.Provision of long term capital to investors both in the public and private sectors.

Other Agencies that Can Access Capital Market

Second-Tier Securities Market

It was established in April 1985 to encourage small and medium-scale enterprises to avail themselves of
the resources of the stock market by making listing requirements and conditions less stringent for this
category of enterprises. The aim is to increase the volume of security in the market.

The Stock Exchange Market

The stock exchange market is a market which deals with the buying and selling of long term financial
asset (securities) such as stock and shares e.g. The Nigerian Stock Exchange (formerly the Lagos Stock
Exchange) was established in 1960.
Dealers in the Stock Exchange

On the stock exchange, there are two main dealers: The stock Brokers and The Jobbers.

The brokers deal directly with the public. They act as their agents who buy and sell securities on their
behalf and offer them advice. They charge a commission for their functions called brokerage.

The Jobber is the main dealer at the stock exchange. He does not deal directly with the public but with
brokers. The broker requests the jobber for his price for a particular security. He quotes two prices-a
high price for selling and a lower price for buying. His profit is known as ‘the jobber turn’ i.e. the
difference between his selling and buying price

Functions of the Stock Exchange

1.Raising of long term capital investment

2.Easy marketing of longterm securities

3.Protection of the public against fraud

4.Offering investment opportunities

5.It acts as a barometer for measuring the economic performance

6.Stabilization of prices of securities

EVALUATION

1.What is money market?

2.List three financial institutions that operates that in the money market

3.State two functions of money market

4.What is capital market?

5.List five instruments that operate in the capital market

6.List three functions of capital market to the economy of your country

7.What is stock exchange?

8.Mention two dealers in stock market

9.List five functions of stock exchange.

Reading Exercises

Essential Economics.
WEEK 4

INFLATION

CONTENT

1.Meaning of Inflation

2.Types of Inflation

3.Causes of Inflation

4.Effects of Inflation

5.Control of Inflation

Sub topic

Meaning of Inflation

Inflation can be defined as a high and persistent rise in the general price level. It is defined as a condition
where there is rise in the average level of price. It is a situation in which supply is not keeping pace with
demand and a situation in which too much money is chasing too few goods.

While anything that tends to increase price is termed inflation and anything that tends to reduce price is
termed deflation, it is not every price increase that is inflationary. A ‘’Once and for all Increase‘’ in the
price level may not be tantamount to inflation.

Types of Inflation

1. Demand Pull Inflation

It is usually caused by excessive demand with supply persistently falling short of it. This may be brought
about by increase in personal incomes, increase in wages as well as increase in government expenditure,
etc. The resultant excess demand leads to an increase in the price level.

2. Cost Push Inflation

The cost pull inflation occurs when there is continuous rise in the cost of production. The increase in the
cost can be in the form of higher wages demanded by workers or an increase in the cost of raw-
materials. When such increase in costs is passed on to the consumers in the form of higher prices, the
we have cost push inflation.

3. Hyper Inflation

This is also known as galloping or run-away inflation. It occurs when there is great increase in
government spending. The prices of goods skyrocket and money rapidly loses its value and becomes
worthless.

4. Chronic Inflation

This type of inflation between 20 and 100% and it goes on for several decades. The danger there is that
this inflation results to a situation where people spend much money to buy tangible goods such as
houses.

5. Creeping Inflation

Inflation in a country is described as creeping when it is persistent but kept relatively low. Sometime, it
is described as creeping and sometimes it is described as trotting.

Causes of Inflation

In developing countries, such as most West African Countries, inflation may be caused by many other
factors other than the ones discussed under types of inflation. The factors are explained below:-

1.Low production of food: Most developing countries especially in been keeping pace with the
population growth rate. The movement of people from rural to urban areas has also worsened the
situation.

2.Inefficient Distribution Process: The system of good distribution in developing country particularly the
West African Countries is clearly inefficient. Poor transportation system hampers distribution, resulting
in shortage of supply and by extension increase in price when supply is at disequilibrium with demand.

3.Over reliance on imported goods: Developing countries usually over-rely on importation of goods to
meet local demand. When there is inflation in a country where they import goods friom, there will be
unavoidable rise in the domestic price level.

4.Poor Storage Facilities: Facilities for storage are usually outdated and unreliable. This has affected
agricultural production seriously.

5.Uncontrolled ambition of many producers and distributors to get more than normal profit has
compelled them to hoard goods. Consequently, there is shortage of goods and prices are forced to go
up.
6.Increase in demand: When the demand for goods and services is greater than supply, this results in
inflation.

7.Low production: Low production of goods and services can lead to their scarcity and when supply
cannot meet up with high demand, then inflation will result.

8.High volume of money chasing few goods: This is a major cause of inflation as people no longer
produce, resulting in high volume of money pursuing fewer goods.

9.Increase in salaries and wages: Excessive increase in the earnings of all categories of labour relative to
productivity thus leading to ‘too much money facing too few goods’.

10.High cost of production: When there is high cost of production, manufacturers pass the high cost to
consumers leading to cost push inflation.

11.Budget deficit: When government spends in excess of expenditure, it leads to inflation.

12.Population increase: A sudden rise in population will lead to increase in demand. If there is no
corresponding increase in supply, it leads to inflation.

EVALUATION

1.Define Inflation

2.State five type of inflation

3.List five causes of inflation

Subtopic: Effects of Inflation

Inflation has both desirable and undesirable effects:

1.It leads to increased earnings and higher profits on the part of businessmen.

2.Reduction in burden of debt i.e. debtors gain.

3.Higher tax yield from high salary.

4.There will be increased investment/higher output.

5.There will be increased employment as a result of large scale production.

6.Inflation redistribute income- income is redistributed haphazardly. There is a fall in real income of
fixed income earners. E.g. pensioners.

7.It discourages saving and investment

8.Creditors loss : The value of money received is far more less that the value of money lent out.
9.Fall in standard of living: The cost of living is high and this leads to the fall in living standard of people.

10.Balance of payment problems: Foreigners will want to sell and also do little purchasing from country
with inflation.

EVALUATION

1.Explain the negative and positive effects of inflation.

2.What are the effects of inflation on distribution of incomes and production.

Subtopic: Control of Inflation

Generally, the causes of inflation must be determined before a solution can be provided. One or a
combination of the following methods can be used to combat inflation.

1.Price control: Government can control inflation by fixing maximum prices for both raw-materials and
finished goods and ensuring adequate implementation of such a policy

2.Increased supply: Necessary raw-materials and basic facilities like water and electricity should be
made available to encourage high increase in manufactured goods, to match demand.

3. Wage Control: Income policies like wage freeze and delay in promotions is equally a way of
controlling inflation.

4.Raising Bank Rates: Increase in bank rate will discourage people from taking loan for investment. This
will reduce the volume of money in the circulation.

5.Open Market Operation: Central bank can use contractionary measures like selling securities to
commercial bank in order to reduce their ability to grant credit to people.

6.Reducing government deficit financing: The government should cut down its budget deficit financing
thereby reduce the magnitude of money supply in the economy.

7.Encouragement of local industries: This will reduce over-reliance on imported goods and bring about
increase in output which will reduce prices

8.Checking the activities of hoarders: Hoarders increase the price of goods unnecessarily, therefore,
their activities must be controlled as this will curb inflation.

9.Increased production: Production could be increased as this will bring down the prices of goods.

Inflation in Nigeria
Inflation in Nigeria can be traced to the period of the civil war. That was the time Nigeria began to
experience inflation or general rise in the price level. Attempt is made below to look at the trend in the
inflationary woes in Nigeria.

-The civil war which took place between 1967 and 1970 triggered inflation. There was a general increase
in the prices of goods and services. War occasions inflation.

-Series of increases in wages not coupled with commensurate level of productivity following the oil
boom have increased the purchasing power of people and triggered demand with supply not recording
any significant improvement.

-Improperly checked importation of commodities has had its share of the blame. A lot of Nigerians have
developed a taste or preference for foreign made products.

Measures Taken by the Government to Control Inflation in Nigeria

1.The Federal government established the price control board in 1971. The board was charged with the
responsibility of fixing the retail prices of certain essential commodities.

2.The administration of Olusegun Obasanjo and that of Shehu Shagari introduced the Operation Feed
the Nation (OFN) and the Green Revolution respectively.

3.The government in spite of occasional concessions has resisted several pressures from the labour
union to increase the salaries of workers in the public service.

4.The government has curbed inflation through its agency, the West African Marketing Boards which
kept the income of the farmers relatively stable by regularizing the amount of prices paid to them
annually for their cash crops.

5.Since the return to democratic rule, the government has been pre-occupied with working out of
measures aimed at improving the level of capacity utilization. The ultimate goal is to work towards
increased production which is capable of alleviating the problem of inflation.

WEEK 5

TOPIC :Deflation

CONTENT

1.Meaning of Deflation

2.Causes of Deflation

3.Effects of Deflation

4.Control of Deflation
Subtopic :Meaning of Deflation

By definition, we mean a time when most prices and cost are falling.It can be defined as a situation of
continuous or persistent fall in the general price level. It is often associated with economic recession and
caused by a persistent fall in aggregate demand which compels the producers to sell at continuously
falling prices.

Causes of Deflation

1.Government Policy/Excessive use of fiscal policy/High tax rate which reduces disposable income

2.Excessive supply over demand: An unusually good weather conditions can cause an over-production of
agricultural products and, hence, lower prices.

3.Increase in bank rate: This discourages commercial banks from borrowing from Central Bank and this
reduces the ability of commercial banks to lend money, leading to reduction in the volume of money in
circulation.

4.Budget surplus: Government policy to spend less than the total revenue will mean too little money in
circulation.

5.Increase in bank rate/restriction on bank lending

6.Increase in production: Increase in the production of goods without corresponding increase in the
volume of money in circulation can lead to deflation.

7.Increase in taxation: When government increases tax, it will definitely reduce the volume of money in
the circulation thereby causing deflation

Effects of Deflation

-Increase in export and decrease in imports: The exported goods are very cheap in the world market and
attract customers while imported goods will be costly, so people will be discouraged from buying
imported materials.

-Deflation brings about unemployment in the labour market.

-The businessmen lose as profit margin dwindles: Low money in circulation leads to decline in profits.

-Fixed income earners gain in the income redistribution: Fixed income earners gain because wages are
fixed and they are able to buy more goods and services.

-Fall in prices of goods: The prices of goods and services tend to fall during deflation because the volume
of money in the circulation is very low.

-Reduction in investment: Low saving leads to low investment.

-Increase in value of money: There is increase in the value of money due to the fact that its supply is
lower than its demand.

Control of Deflation

1.Reduction in taxation: This enables people to have more money, thereby increasing their purchasing
power and controlling deflation.

2 Use of deficit budgeting: An increase in government expenditure helps to inject more money into
circulation by curbing the effects of deflation.

3.Reduction in bank rate: This assists investors to borrow more from banks, thereby increasing the
volume of money in the circulation.

4.Increase in wages and salaries: This helps to inject more money into circulation, thereby controlling
deflation

5.Use of open market operation: CBN buys securities from commercial banks to be able to lend money
out and increase the volume of money in circulation.

EVALUATION

1.Discuss to the extent that you can, the term inflation.

2.Identify two losers and two gainers during inflation

3.What are the effects of deflation in an economy?

ASSIGNMENT.

Essential Economics.

WEEK 6

CAPITAL MARKET

CONTENT

1.Meaning and Functions

2.Primary And Secondary Market

3.Stock Exchange
4.How Stock Exchange operates

5.Development Banks (Functions)

Subtopic: Defintion

Capital Market- is a market for medium and long-term loans. The capital market serves the needs of
industries and the commercial sectors. It comprises all institutions which are concerned with either the
supply of or demand for long-term loans. The capital market provides a system by which money for
investment is distributed to institutions which require funds for their further growth.

FUNCTIONS OF CAPITAL MARKET

1.It helps to provide long-term loans to investors

2.It helps to mobilize savings for investment purposes

3.It helps to enhance the growth and development of merchant banks

4.It gives opportunity to the general public to participate in the running of the economy

Evaluation

1. What is capital market?

2.Outline three functions of capital market.

PRIMARY OR FIRST TIER SECURITIES MARKET

Primary Market- is a market where new securities (share, stock, bond, etc) are either bought or sold.
That is a market where securities are traded for the first time. The operators in this market are the
issuing houses such as stockbrokers, merchant banks, commercial banks, mortgage banks, insurance
companies, the Central Bank of Nigeria and government. Investors pass on their resources to some of
these institutions for investment purposes. Thus, these financial institutions effectively play the role of
financial intermediation by mobilizing the savings of investors and investing them. The Securities and
Exchange Commission sits at the apex of the primary market, regulating the issues of public companies
and all private companies with foreign participation.

SECONDARY OR SECOND TIER SECURITIES MARKET

Secondary Market- is a market in which buying and selling of existing securities of companies take place.
It came into existence to complement the efforts of the Stock Exchange Market towards funds
mobilization for investment. Second tier securities market is an appendage of the Stock Exchange and
therefore serves to assist. The major participants in this market are stockbrokers and banks such as
acceptance houses, investment banks, issuing houses, etc. The mode of operation in this market is
similar to that of the first tier securities market but less restricted. The centre of activities for the
secondary market is the Stock Exchange which provides a market in which holders of existing ‘quoted’
shares wishing to sell such shares can make contact with individuals and institutions who are interested
in buying them. Hence the secondary market is dominated by the Stock Exchange, which provides a
forum for trading in securities. Such a forum is a absolute necessary since many of the buyers of new
securities will eventually resell them.

EVALUATION

1.What is first tier securities market?

2.Explain the Securities and Exchange Commission.

STOCK EXCHANGE

Capital serves as the nucleus of any functional business unit. The need to source for this factor becomes
a major focus of the finance manager. Registered companies or Limited Liabilities companies need fund
in large volume. Hence there’s need to source for fund. A market which provides an answer to this is
the stock exchange market.

Stock Exchange- is a highly organized market where investors can buy and sell existing securities such as
shares, debenture, stock. The stock Exchange serves as medium through which companies raise capital
for growth and development. The stock exchange market ensures that every transaction must follow
prescribed set or rules and regulations, which are complex in nature. The Lagos Stock Exchange which is
an essential part of the capital market was established in 1960 through the Act of parliament with its
branches in Abuja and Port Harcourt. All public Limited Liability companies are quoted in stock
exchange.

FUNCTIONS OF STOCK EXCHANGE

1.Stock Exchange market serves as avenue of raising capital for business growth.

2.It provides employment opportunities for vast number of people e.g. brokers, jobbers,

clerks and others Information which informs business decision are made available to foreign and local
investors through stock exchange.

3.Stock Exchange provides yardstick for measuring performance of quoted companies.

4.Stock Exchange provides avenue for the public to invest their idle fund in form of subscribing shares.

5.Dividends that accrued to shareholders serves as revenue in turn improve their living standard.

EVALUATION

1.What is Stock Exchange? Mention any securities traded in stock Exchange.

2.Outline five functions of stock exchange.

PARTICIPANTS OF STOCK EXCHANGE

The following are the participants in the stock exchange.

1.Public Limited Liability Companies e.g. Dunlop Nig. Plc, Access Bank Plc, First Bank of Nigeria Plc,
Zenith Bank, Guinness Nigeria Plc, UTC Nigeria Plc, Longman Nigeria Plc etc.

2.Brokers

3.Jobbers

4.Speculators (Bull ,Bear and Stag)

5.Government

INSTRUMENTS TRADED IN STOCK EXCHANGE MARKET

The instruments used in stock exchange market are shares, stock and debenture

1.Shares and Stock – Stocks and share are securities purchased by individuals, which is an evidence of
contributing part of the total capital used in running an existing industry. Share and stockholders are
entitled to dividend

2 Debenture – In financing business, the owner’s fund (equity) can be used or debt. Debenture is a debt
instrument which entitles the owner to a series of cash flow known as interest. A debenture holder is a
creditor to a business unlike the shareholders.

DEVELOPMENT BANK

A development bank is a financial institution setup purposely to offer medium and long term loans
meant for development. It provides loans for projects in the area of agriculture, commerce and industry.

EXAMPLES OF DEVELOPMENT BANKS IN NIGERIA

(1) BO1- Bank of Industry

(2) NARDB- Nigerian Agricultural and Rural Development Bank

(3) FMBN- Federal Mortgage Bank of Nigeria

(4) UDB – Urban Development Bank

(5) NEB – Nigerian Education Bank

FUNCTIONS OF DEVELOPMENT BANKS

1.Provision of long term loans for capital projects

2.Implementation of government’s industrial development policies

3.Supervision of projects
4.They give advice to both the government and industrialists

5.They underwrite securities issue

6.They contribute to manpower development and provision of technical support

7.They conduct extensive study on the industrial sector e.g. feasibility studies

EVALUATION QUESTIONS

1.Define development banks

2.Outline five functions of development banks

READING ASSIGNMENT

Essential Economics

WEEKEND ASSIGNMENT

1.A government treasury bill is a form of debt instrument which falls due for repayment after. (a) 3
months (b) 9 months (c) 2 years (d) 5 years (e) 10 or more years

2.A stockholder partakes of the profits of a limited liability business by receiving. (a) shares (b) profits
(c) wages and salaries (d) dividends (e) gifts

3.A debenture holder is entitled to payments in form of _____ (a) allowance (b) interest (c)
salary (d) donation

4.Long term loans can be secured from _______ (a) commercial banks (b) discount houses (c)
development banks (d) acceptance house

5.In the capital market, money can only be borrowed for ___________ (a) long term (b) short term
(c) capital projects (d) public utilities

THEORY

a What is a capital market? b Describe any three instruments used in the capital market.

a Define Stock Exchange. b Outline any five functions performed Stock Exchange.

WEEK 7
NATIONAL INCOME

CONTENT

1.Meaning and Concepts

2.Measurement of National Income

3.Problems of Measuring National Income

4.Use of National Income.

NATIONAL INCOME

As individuals and firms keep account of their economic activities such as their annual report which
shows all their activities during the past year, countries too like individuals and firms do record and keep
their economic activities.

National Income- is defined as the monetary value of the total volume of goods and services produced
by a country in a year. It is the money value of the total income earned by all the factors of production in
a given country over a period of time usually a year. On the other hand, it is the sum total of money
value of all individual expenditure on goods and services at the market price.The National Income is
different from the income of the government which refers to the revenue the government raises
through taxation and borrowing.

DEFINITION OF CONCEPTS

A. Gross Domestic Product (GDP): This is defined as the total monetary value of all the goods and
services produced in a country in a year by all the residents of the country regardless of whether they
are citizens or foreigners. It relates to a closed economy, that is, it excludes the earnings or investment
of citizens abroad but includes the earnings of foreigners or earnings from foreign investment in the
country.It can be measured at factor cost (adding together of production) or at the market prices.

In its calculation, no allowance is made for depreciation. So, it is best expressed as the addition of these
three aggregates.

GDP = C + I + G

where C = Consumption

I = Investment

G = Government expenditure

The GDP is used as an economic indicator in determining whether the country is growing, declining or
stagnant.
B. Gross National Product (GNP): This is the monetary value of goods and services produced by the
citizens of a country (including income from their investments both at home and abroad).

It is the total value of goods and services plus Net income from abroad which can be represented as ( x –
m ) where x = export and m = import

That is to say, it includes the earnings of the citizens or their investment in other countries but excludes
the earnings of foreigners or their investment in the country. In this case, no allowance is also made for
depreciation.

Mathematically, it is expressed as: GNP = GDP + Net Income from abroad; or

= GDP + x – m; or =C+I+G+x–m

C. Net Domestic Product (NDP): It is defined as the total monetary value of goods and services
produced by all the residents of a country and earnings from their investment (whether citizens or
foreigners) after allowance have been made for depreciation.

Mathematically, it is represented as:

NDP = GDP - Depreciation; or = C + I + G – Depreciation

D. Net National Product (NNP): This is the difference between GNP and estimated Depreciation or
capital consumed during the year; this is the GNP less depreciation. This is the monetary value of goods
and services produced by all the citizens of a country and income from their investments (whether at
home or abroad) after allowance has been made for depreciation.

NNP = GNP – Depreciation; or = C + I + G + (x – m) – Depreciation

E. Personal Income: This is the earnings of an individual in monetary terms for taking part in the
production of goods and services either by him or his property. It includes wages to labour for its`
services, interest received by capital owner, rent paid to the owner of the land, and profit received by an
entrepreneur.

F. Disposable Income: This is the income from all sources that accrue to household and private non-
profit institutions after deducting personal income tax and other transfers to them. It is the income
actually available for spending and saving.

It can therefore be summarized as: Disposable Income = Personal Income – Personal Tax.

G.Per Capita Income (PCI): It is the national Income head of the population . It is the National Income
divided by the total population of a country. It is an economic indication of a country’s level of standard
of living. Whether the PCI of a country is high or low depends majorly on the available resources and the
size of the population of the country.

However, an increase in GNP of a country does not mean an increase in PCI.

By formula, it is expressed as PCI = GNP / Total population

EVALUATION

1.What is the difference between the GDP and the GNP

2.Explain the meaning of Net factor income from abroad

MEASUREMENT OF NATIONAL INCOME OF A COUNTRY

1.Income Approach: In this method, the total monetary values of income received by individuals,
business organizations, government agencies within a year for their participation in production. The
income received by factors of production in the form of wages or salaries, rent, interest and profits is
added together. To avoid double-counting, transfer incomes or payments are not included. By using this
approach, we arrive at either the G.N.P or G.D.P at factor cost.

2.Output or Net product Approach: - This is based on the census of production. It measures the value of
all goods and services produced in a country during the year. To avoid double-country, income is
measured on a value- added basis. (Value-added is the value of output, less cost of input). Natural
income derived in this way gives the G.D.P at market prices. To get the G.D.P at factor cost, we subtract
taxes and add subsidies.

3.Expenditure Approach: - This is the calculation of the total monetary value of expenditure on goods
and services by government individual organization etc. within a country in a given period. In this
calculation expenditure on inter mediate goods and services bought and used for further production
must be excluded. This is done in order to avoid double counting and therefore, the calculation should
particularize only on expenditure on the monetary value of final goods and services.

EVALUATION

1.List three methods of calculating the national income.

2.Define the income method.

REASONS WHY A COUNTRY MEASURES HER NATIONAL INCOME

1.It gives an indication of the standard of living of the country through the measure of per capita
income.

2.It helps the country to determine the growth rate of the economy

3.The national income estimate is vital for economic policy and planning.

4.Measured through the output approach enables the country to know the performance of the various
sectors of the economy.

5.The national income data gives an idea of the pattern of expenditure of households.
EVALUATON

1.Write short note on the expenditure method of computing national income

2.Give five reasons for measuring the national income of a country.

PROBLEMS ASSOCIATED WITH NATIONAL INCOME MEASUREMENT

1.They do not reveal the income distribution in a country. National income estimate does not indicate
whether income is widely spread or concentrated in a few hands.

2.There is a difference in the internal value of money. The standard of living to a large extent depends
on the value of money.

3.Double counting: At times it is problematic differentiating capital goods from consumer ones, they are
therefore counted twice which give false national income.

4.Determining what income is: Determining what is income to a person, what constitutes economic
activities the rewards for some services like that of full-time house wives subsistence farmers, self-
employed etc. constituting problems to national income measurement.

5.The problems created by the self employed. Many self-employed in our society do not keep proper
book of account and therefore, it is very difficult to ascertain what their incomes, expenditures and
outputs are.

6.Inflation and deflation: Inflation raises national income figure, while deflation reduces it. Problems
here is how to arrive at accurate national income figure that is not affected by either inflation, or
deflation

7.Determining Depreciation Value: - The inability of many business units and individuals ventures to
calculate the depreciation of their machinery makes it difficult to ascertain the true position of a
country’s national income.

WEEKEND ASSIGNMENT

1.GDP at the market prices plus net factor income from abroad gives ___ (a) gross capital formation (b)
net capital formation (c) disposable income (d) gross national product.

2.GNP less depreciation is known as ___ (a) Gross Domestic Product (b) Gross National Income (c) Fixed
National Income (d) Net National Product.

3.In calculating the GNP by the income approach, all the following are included except _____ (a) Wages
and Salaries (b) direct taxes paid by persons and companies (c) Rents on Houses (d) retirement benefits
(e) business profits

4.NNP is equal to the _____ (a) GDP less depreciation (b) GNP less depreciation (c) GDP plus
depreciation (d) GNP plus depreciation (e) GNI plus taxation
5.The difference between the GDP and the GNP is the_______(a) allowance for total depreciation (b)
total interest payment ( c) net income from abroad (d) total tax and interest payments (e) net internally
generated income

THEORY

1.Define the National Income

2.Isolate six basic concepts peculiar to National Income and briefly explain any one.

WEEK 8

THEORY OF INCOME DEVELOPMENT

CONTENT

1.Circular Flow of Income

2.Concept of Saving

3.Concept of Investment

4.Concept of Consumption

CIRCULAR FLOW OF INCOME

Circular flow of income shows the independence or relationship between households and business
enterprise

Supply of Goods and Service

Payment for goods and services

Wages, Interest, Rent and Profit

Productive Services or Resources

Commodity and money flows between households and firms. It shows the flow of payments from
business sector to households in exchange for labour and other productive services and the return flow
of payments from households to business sector in exchange for goods and services.The household or
the personal sector offers its labour services to the business sector or firms in the production of goods
and services. The household is rewarded in form of wages, interest and rent which it spends on the
consumption of goods and services produced in the economy.

FACTORS THAT BRINGS ABOUT CHANGES IN THE CIRCULAR FLOW OF INCOME

1.Withdrawal: This part of all the income that is not all owed to pass through the normal channel of
circular flow of income.

2.Injection: This forms an increase in the income of households, producers outside their normal
processes of selling productive resources and manufactured goods.

3.Savings: These are part of income which are not consumed immediately and they reduce households
and producers expenditures.

4.Investment: This reduces and creates additional income either immediately or in future.

5.Gifts and grants: They may come from governments to households and firms and help increasing their
incomes

6.Taxes: They reduce the expenditures of households and firms on goods and factor services.

7.Imports: They involve expenditure on foreign made goods and services and constitute withdrawals
from the circular flow of income.

8 Export: They Provide money from other countries and act as injection into the domestic circular flow
of income.

EVALUATION

1 Explain the following terms:

Withdrawal ii. Savings iii. Injection. Iv. Import and Export

CONCEPTS OF SAVINGS, INVESTMENT AND CONSUMPTION

1.SAVINGS

Savings are made up of disposable income which is not spent on consumer goods and services. Saving
involves forgoing some present consumption.

Individuals save for the following reasons:

1.To raise capital

2.For unforeseen contingencies

3.For speculation

4.To acquire assets

5.For future purposes

6.To raise social status

Factors that affect savings

The size of income

The rate of interest

Cultural attitude

Government polices

INVESTMENT

Investment may be defined as expenditure on physical assets which are not for immediate consumption
but for production of consumer and capital goods and services.

Types of Investment

1.Individual investment: This may be on building, motor vehicles and other assets the individual hopes
may increase his income and standard of living.

2.Investment by firms: This can be on buildings machines, furniture, raw materials, semi finished and
finished goods.

3 Government investment in social capital; These are in the areas of roads, electricity, pipe borne water,
hospitals schools.

Purpose: to improve the living condition of the citizen.

Factors that determine investment

1.The amount of income earned.

2.Savings

3.Profit

4.The amount paid as tax

5.The rate of interest

6.Expectation etc

CONSUMPTION
Consumption is the sum of current expenditure on goods and services by individuals, firms and
government. It is also mean part of income not saved or invested. The level of consumption of an
individual depends largely on his level of current income.

Factors that determine the level of consumption

1.The level of income

2.Savings

3.Expectation of price changes

4.The rate of taxes paid

5.The influence of other households

6.Assets owned

7.Business profit

EVALUATION

1.Give five factors that determines the level of consumptions.

2.What is Investments?

The Relationship Between Income, Consumption, Savings And Investment

Income, consumption and savings are related. The amount of income earned (household) determines to
a large extent the level of consumption of an individual as well as the amount which can be saved. This is
represented by the formula. Y = C+S, where Y = Income, C = Consumption expenditure and S = Savings

Also, income, consumption and investment are related. The amount of income earned (business sector)
determines to a large extent the level of spending on the running overhead cost (consumption) as well
as the amount spent on further investment. This is represented by the formula: Y = C + I , where Y =
Income , C = Consumption expenditure , I = Investment Expenditures

In forming an equation with household income and the business sector’s income, we have:

C + S = C + I

S = I

Consumption influences the level of national income. If people consume more, it encourages further
production. Economy is at equilibrium when aggregate saving equals aggregate investment and full
employment is achieved at this level. We save in order to accumulate capital for investment and for
many other personal reasons. There will be no investment without saving. Investment, in turn, creates
employment and income for people. Without income, we shall have nothing to save and nothing to
spend on consumption of goods and services.

EVALUATION

1.How is the national income of a country determined?

2.Explain two ways by which members of household dispose their income

READING ASSIGNMENT

Essential Economics

WEEKEND ASSIGNMENT

1.The part of income that is not spent is known as ____ (a) multiplier (b) saving

(c) expenditure (d) depreciation

2.All these factors tend to reduce the amount of funds in the circular flow of income except...................
(a) savings (b) grants (c) imports (d) taxes

3.The real capital investment of a country is a reflection of it’s............... (a) total debts

(b) total goods (c) total income (d) total reserve

4.An expenditure on physical assets which are not for immediate consumption is known as............... (a)
a consumption (b) an investment (c) a liability (d) a saving

..................is the major determinant in the concepts of saving, investment and consumption. (a) cost of
living (b) multiplier (c) standard of living (d) income.

THEORY

1.Identify and explain briefly the two major factors affecting the circular flow of income.

2.Simply explain the concept of income in relation to saving, investment and consumption.

WEEK 9

EQUATION AND CALCULATION OF INCOME DETERMINATION

CONTENTS

Y = C + I + a + (x – m)
1 Calculation of APS

2.Calculation of APC

3.Calculation of MPS

4.Calculation of MPC

NATIONAL INCOME AND ITS CALCULATION

In calculating the National Income for an open economy where import and export are involved
(International Trade). A function such as:

Y = c + 1 + a + (x-m) could be used in arriving at the aggregate income in this function.

Y = The value of national income

C = Aggregate Investment expenditure (consumption)

I = Private Investment expenditure

X = Export expenditure

M = Import expenditure

Xn = Net exports (Xn >0)

Example 1

Below is information concerning the gross national product for a country in 1994 (in billions of naira) by
sectors that buy the GNP.

Heading Amount

Personal Consumption expenditures 637.3

Gross Private domestic investment 452.2

Government purchase of goods and services 105.3

Exports of goods and services 1001.

Imports 50.3
1.What method of national income is used for the above table?

2.Calculate the national income of the solution.

Solution

The method used is the expenditure method.

Since we are concerned with the expenditure method we have.

GNP = C + I + G + (x – m)

Substituting GNP = N637. 3 + N453.2 + N105.3 + (N100.1 – N50.3) = N1,245.66

Example II

The national income equation of a hypothetical country is expressed as:

Y=C+I+G

Where:

C = a + by

N100m + 3/4Y

I = N20m

G = N40m

Where C, I and G are consumption, investment and government expenditure respectively. Calculate the
equilibrium level of national income.

Solution:

Y =C+I+G

Y = a + by + I + G

Substituting into the equation above

Y = N100m + 3/4Y + N40m

Collecting like terms

(Y – 3/4Y) = 100 + 20m + N40

Factorise the RHS

Y(1 – ¾)
Y ( ¼ ) = N160m

Divide both sides by ¼

Y/¼ 160

¼ = ¼

Y = 160 x 4/1 = N640m

PROPENSITIES TO CONSUME

1.Average propensity to consume (APC)

This is the ratio of consumption to income. Also, it is the fraction of the national income

consumed. That is,

APC = Total National Consumption = C

Total National Income Y

Algebraically

APC = 1 (as c = y)

C = Y X APC

APC >1 as C >Y

Y = C/APC

All things being equal, the average propensity to consume falls between zero and unitary.

Example 1

Calculate the average propensity to consume. If the national income is N20m and the total National
Consumption is N15m

Solution

APC = C/Y

Substituting into the formula above

APC = N15M

N20m = 0.75

Example II
If the national income is N150m and the average propensity to consume is 0.2. Calculate the total
national consumptions.

Solution:

Applying

C = Y x APC

= N150m x 0.2

= N30m

EVALUATION

1.Find the national income when the total consumption is N600m and the average propensity to
consume is 0.4.

2.Calculate the average propensity to consume if the national income is N40m and the total National
Consumption is N30m.

Marginal Propensity To Consume (MPC)

Marginal Propensity to Consume (MPC). This can be defined as the ration of the change in consumption
to the change in income that necessitated it. That is,

MPC = Change in Consumption = â C

Change in income â Y

OR

MPC = â C (Infinitesimal Change) – A very Small Change

â Y

O < MPC < 1

MPC falls between Zero and one

Algebraically

â C = MPC x â Y and

âY = âC

MPC

Example 1
If total national income increases from N1,500m to N1,800m and the total national consumption
increases from N500m to N650m. What is the MPC.

Solution:

MPC = â C

âY

Substituting

MPC = (650 – 500)m

1,800 – 1,500

MPC = N150m = 0.5

N300

Example 2

Given that the total national income increases from N750m to N1000m and the MPC is 0.7, find the
change in consumption.

Solution.

â C = MPC x â Y

âY = N1000m – N750m = N250m

Substituting

â C = 0.7 x N250m

= N175m

Example 3

Determine the change in the total income if the change in the total national consumption is N300m and
the MPC is 0.4.

Solution

Applying

â Y = â C = N300m = N750m

MPC 0.4

EVALUATION
1.If total national income increases from N2,500m to N2.800m and the total national consumption
increases from N700 to N950m. What is the mpc.

2.Determine the change in the total national income if the change in the total nation consumption is
N600m and the mpc is 0.8

PROPENSITIES TO SAVE

Average Propensity To Save (APS)

This is defined as the ratio of savings to income. That is, the ratio of income saved (nationally) to the
national income. It is denoted thus:

AP = Total National Savings = S

Total National Income Y

O < APS < 1 (provided O < S < Y)

APS = 1(as S = Y)

APS = O (as S = O) Zero savings

Algebraically

S = APS x Y and

Y= S

APS

Example 1

If total national savings is N50m and the total national income is N500m, then the APS will be thus:

Solution:

Applying

APS = S

Substituting

APS = N50

N500

APS = 0.1
Example 2

Calculate the total national income if the total national savings is 250m and the APS is 0.2.

Solution:

Applying

Y= S

APS

Substituting

APS = N250

0.2

APS = N1,250m

Marginal Propensity To Save (MPS)

This is defined as the ratio of the change is savings to the change in income that necessitated it. It is
denoted thus:

MPS = Change in Savings âS

Change in income âY

OR

MPS = â S (infinitesimal change) - A very small change 0 < MPS < 1

MPS falls between zero and one

Algebraically,

â S = MPC x â Y and â S

âY MPS

Note: MPS + MPC = 1

MPS = 1 – MPC

Example 1

What is the MPS if the total national income increase from N375 to 450m and the total national savings
increases from N85m to N100m

MPS = ∆S

âY

Substituting

MPS = (100 – 85)

450 – 375

MPS = N15m = 0.2

N75m

Example II

If the change in the total national income is N300 and the mps is 0.6, what will be the total national
savings.

Solution:

â S = MPS x â Y

= 3000 x 0.6 = N180m

Example III

Given the change in the total national savings is N120mand the MPS is 0.3 calculate the total national
income.

Solution

Applying

âY = âS

MPS

= N120m = N400m

0.2

Example IV
Find the mps when the mpc is 0.6

Solution

mpc + mps = 1

therefore mps = mpc – 1

mps = 0.6 – 1

mps = -0.4

mps = 0.4

WEEKEND ASSIGNMENT

1.The disposable income of Ade increases by #10 million and her marginal propensity to consume also
goes up to #0.6 , how much of the additional will she save? (a) #40,000 ( b) #400,000 ( c) #600,000 (d)
#4,000,000

Given the investment and consumption function of a two sector economy as

C = 25 + 0.30 y and I = 10 million . What is the equilibrium level of income?

(a) #50m (b) #500m ( c) #5000m ( d) #5.500m (e ) #5.550m

2.If the national income is N150m and the average propensity to consume is 0.2 calculate the total
national consumption. (a) N30m (b) N40m (c) 15m (d) 10m

3.Calculate the average propensity to consume if the national income is N20m and the total national
consumption is N15m. (a) 0.25 (b) 0.17 (c) 0.75 (d) 0.1

4.Determine the change in the total national income if the change in the total national consumption is
N300m and the MPC is 0.4 (a) N750m (b) N400m (c) N500 (d) N400m

THEORY

1.Explain the term propensity to consume and its effects on the economy

2.State the two attributes of propensity to save.

WEEK 10

THE THEORY OF MULTIPLIER

CONTENT

1.Meaning of Multiplier

2.Equilibrium Level of Income

DEFINITION OF MULTIPLIER

The theory of the multiplier- states that an increase in consumer or business investment spending in a
country would produce a multiplier effect by raising the level of national income. The multiplier effect
can be as a result of changes in consumption expenditure, which is known as consumption multiplier or
investment changes, which is known as investment multiplier.

The concept of multiplier shows that a small change in investment can have a magnified effect on
income. Multiplier = 1 / (1-MPC) where MPC equals marginal propensity to consume.

Total increase in income depends on the marginal propensity to consume . If MPC is high , the multiplier
will be high and rise in income will be high when people spend on consumption , the level of national
income rises.

Example:

Considering #100 million increase in investment , suppose 4/5 of the investment was consumed 1/5
would have been saved.

Increases in Income = Investment / 1- MPC

= 100m/ (1- 4/5 ) = 100m / (1/5)

= 100m x 5/1

= 500 million

The total increase in income is five times the initial increase in investment. Therefore, Multiplier is 5.

The multiplier denoted by K is usually calculated with the aid of formula

K = 1 = 1

1 – mpc mps

K=âY

âC

Where K = multiplier

Mpc = marginal propensity to consume

Mps = marginal propensity to save.

Y = change in national income

C = Consumption expenditure

I = Investment

Example 1

If the marginal propersity to consume is 0.8, calculate the multiplier.

By how much must consumption expenditure be increased to increase income by N10,000.

Solution

(a). K= 1 = 1 = 1 = 5

1 – mpc 1 – 0.8 0.2

The multiplier K has a value of 5

(b) K=âY

âC

5 = N10,000

Cross multiply

5 x C = 10,000 x 1

C = 10,000 = N2,000

EVALUATION

1.What is meant by the multiplier

2.Calculate the total national income if the total national savings is N250m and the APS is 0.4

3.If the mps is 0.4 what is the mpc.

EQUILIBRIUM LEVEL OF INCOME

Equilibrium Level of Income- is a situation where the total amount people wish to save equals total
investment of business units. It refers to a point at which the aggregate saving equals aggregate
investments. At equilibrium level of income, there is a balance between or equality of saving and
investment.

Again, at equilibrium level of income, there is a balance between the aggregate demand and aggregate
supply, and there will be no tendency to increase or decrease output. The business sector is satisfied
that the right volume of output has been achieved and there will be no tendency to alter it.

For equilibrium national income to be maintained, the volume of total withdrawals from the circular
flow of income must be equal to the volume of total injections. That is, total amount of saving must be
equal to total value of investment, and aggregate expenditure must be equal to total output.

Income earners (household) can spend their income on consumption of goods and services or save it,
hence, Y = C + S. On the other hand, the firms can spend its income on the running overhead expenses
or invest it, hence, Y = C + I. Probing this equation further, we will arrive at a situation of, S = I, where the
aggregate saving equals aggregate investment that indicates the general equilibrium level of income.

NOTE: For Y to be constant, the level of savings (S) must be equal to investment (I). By implication, the
amount of consumption goods and services produced by firms will be equal to the aggregate demand of
the people (household).

EVALUATION

1.Explain what is meant by equilibrium level of income in an economy .

2.How is equilibrium level of income in an economy attained ?

WEEKEND ASSIGNMENT

1.If a firm earns an annual income of N80m and spent N50m on procurement of working
materials,calculate the APS of the firm. (a) 0.38 (b) 0.72 (c) 0.91 (d) 0.11

2.If the marginal propensity to save is 0.45, calculate the multiplier

(a) 0.75 (b) 2.2 (c) 0.14 (d) 0.95

3.In question 2 above calculate the level of investment which is required to raise income by N12,000 (a)
N1,456 (b) N5,454.55 (c) N4.646 (d) N4890.1

If the mps is 0.3. What is the mpc.

(a) 0.1 (b) 0.5 (c) 0.7 (d) 0.15

4. At the equilibrium level of income of an economy, the total expenditure

equals....... (a) total assets (b) total output (c) total investment (d) total capital

THEORY
1.If the monthly income of an individual increases from N8,000 to N12,000 and the increases his level of
consumption by N60.00, calculate the marginal propensities to save and to consume.

2..Briefly explain the three different ways by which the equilibrium level of income of an economy can
be determined.