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Transcript of 1st Assignment
Submitted by: Asad Danish Siddiqui
1st Assignment
Submitted to:Mr. Faisal Sultan Qadri
Course InstructorECONOMICS ANALYSIS FOR MANAGEMENT
IQRA University Gulshan CampusKarachi
Submitted by:Asad Danish Siddiqui
1462
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Submitted by: Asad Danish Siddiqui
1. Explain why an economy’s income must equal its
expenditure?
Economy’s Income equal to its expenditure because of
house hold buy goods and services from firm to fulfill its
needs from firms, and these expenditures flow through the
markets for goods and service. The firm gets the money
after selling the goods and services to household and uses
this for to pay workers’ wages, landowners’ rent, and firm
owners’ profit. This income flows through the markets for
the factor of production (Land, Labor, Capital and
entrepreneur) or to whom who provided their services for
the production of goods.
In this scenario money flows continuously from
households to firms and then back to households.
2. Which contributes more to GDP—the production of
an economy car or the production of a luxury car?
Why?
Ans: GDP is measure by Market prices because of market
prices measure the amount people are willing to pay
for different goods. So the production of a luxury car
contributes more to GDP than the production of
economy car because the market price of luxury car is
higher than the price of economy car.
3. A farmer sells wheat to a baker for $2. The baker uses
the wheat to make bread, which is
sold for $3. What is the total contribution of these
transactions to GDP?
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Submitted by: Asad Danish Siddiqui
Ans: when farmer sells wheat to baker $ 2 and baker uses
wheat to make bread and sold in market $ 3, so the
total contribution of this transactions to GDP is $ 3
because baker purchase wheat from farmer $2 and
further processed it and sold in the market $3, so $3 is
the market value of bread(final goods).
4. Many years ago Peggy paid $500 to put together a
record collection. Today she sold her
albums at a garage sale for $100. How does this sale
affect current GDP?
Ans: The sale of used records does not affect the current
GDP because it is not a part of current
Production where as by definition GDP measure
market value of all the goods produced in a country
within a year.
5. List the four components of GDP. Give an example of
each.
National Income equation or GDP is Y= C+I+G+NX
so the four component of GDP are
C=Consumption: when household purchases the goods
or services he is involve in consumption pattern for
example purchase of new car.
I=Investment: when households or firms invest money
somewhere for the business purpose in order to make
return in his investment. For example: purchases of
raw material by a business.
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Submitted by: Asad Danish Siddiqui
G=Government: All government Income and
Expenditure such that purchases of Military
equipment.
NX= Net Export: when selling the goods and services
outside the geographic boundary such that sale of
wheat to other country in the world.
6. Why do economists use real GDP rather than nominal
GDP to gauge economic well-
being?
Ans: Economists use real GDP rather than nominal GDP to
gauge economic well-being because real GDP is not
affected by changes in prices, so it reflects only
changes in the amounts being produced. You cannot
determine if a rise in nominal GDP has been caused by
increased production or higher prices.
7. In the year 2001, the economy produces 100 loaves of
bread that sell for $2 each. In the year 2002, the
economy produces 200 loaves of bread that sell for $3
each. Calculate nominal GDP, real GDP, and the GDP
deflator for each year. (Use 2001 as the base year.) By
what percentage does each of these three statistics rise
from one year to the next?
Year Nominal GDP Real GDP GDP Deflator
2001 100 x $2 = $200 100 x $2 = $200 ($200/$200) x 100 = 100
2002 200 x $3 = $600 200 x $2 = $400 ($600/$400) x 100 = 150
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Submitted by: Asad Danish Siddiqui
Ans: The percentage change in nominal GDP is (600 −
200)/200 x 100 = 200%. The percentage change in
real GDP is (400 − 200)/200 x 100 = 100%. The
percentage change in the deflator is (150 − 100)/100 x
100 = 50%.
8. Why is it desirable for a country to have a large GDP?
Give an example of something that would raise GDP
and yet be undesirable.
Ans: It is desirable for a country to have a large GDP
because people could enjoy more goods and services.
But GDP is not the only important measure of well-
being. For example, laws that restrict pollution cause
GDP to be lower. If laws against pollution were
eliminated, GDP would be higher but the pollution
might make us worse off. Or, for example, an
earthquake would raise GDP, as expenditures on
cleanup, repair, and rebuilding increase. But an
earthquake is an undesirable event that lowers our
welfare.
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