ME Unit 3 Managerial Economics
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Transcript of ME Unit 3 Managerial Economics
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Introduction to National Income
Models of National Income
Determination - Economic Indicators -
Technology and Employment - Issues andChallenges; Business and Government.
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The well-known writer, Paul
Studenski, writes: "Nationalincome is both a flow of goodsand services and a flow of moneyincomes. It is therefore callednational product as often asnational income".
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Gross National Product(GNP) Gross Domestic Product(GDP)
Net National Product(NNP)
National Income(NI) Personal Income(PI)
Disposable Income(DI)
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Total market value of all goods and servicesproduced in a country in a particular year, andthe income which is earned by its citizens, whoare located abroad minus the income of nonresidents located within that country.
GNP is a measure of the value of goods andservices, which the nationals or residents of thecountry produce regardless of where they arelocated.
Total Income of a nation as earned by the
citizens of a nation GNP = GDP incoming money from abroadOutgoing money to abroad
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It includes the value of goods produced suchas houses and food grains and the value ofservices such as broker's services andeconomist's lectures
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Total market value of all the final goods andservices produced by all the enterprises(boththe residents and non residents) within thedomestic territory of a country in a particular
year
GDP=C+I+G+NX
Nominal Vs. Real GDP
GDP Deflator(Nominal GDP/Real GDP)*100
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Farmer produced Wheat and sold 100 kg of it@ 2000 Rs. (Original value)
Flour mill, purchased it, grinded it and soldthe flour to baker @ 2500 Rs.
Baker made breads, cookies and biscuits andsold the total production @3500 Rs to itsfinal customers.
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Year Quantity ofBanana Price ofBanana Quantity ofApple Price ofApple2005 100 2 50 10
2006 150 3 70 15
2007 200 4 90 20
Answers:Nominal GDP:
2005=7002006=1500
2007=2600Real GDP:
2005=7002006=10002007=1300
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GNP=GDP + Factors payment from Abroad-Factor payments to abroad
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GDP GNP
Definition: An estimated value of the total worth of
a countrys production and services,
calculated over the course on one year
GDP (+) total capital gains from
overseas investment (-) income earned
by foreign nationals domestically
Stands for: Gross Domestic Product Gross National Product
Formula for Calculation: GDP = consumption + investment +
(government spending) + (exports
imports)
GNP = GDP + NR (Net income from
assets abroad (Net Income Receipts))
Layman Usage: Total value of products & Servicesproduced within the territorial boundary
of a country
Total value of Goods and Servicesproduced by all nationals of a country
(whether within or outside the country)
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
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NNP(at market price)=GNP- Depriciation
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NNP at factor cost National Income= NNP at Market price-
Indirect Taxes+Subsidies
NI=NNP at Market price-Net Indirect Taxes
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Sum of all incomes actually received by allindividuals or households during a givenyear.
PI=NI-(corporate profits+social securitycontributions+NetInterest)+(Dividends+Transfers from Govt. toIndividuals+personal interest income)
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Aggregate Demand and Aggregate SupplyApproach
Saving-Investment Approach
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Consumption Function(C)=Ca+ bYWhere Ca= Intercept of consumption function on Y
axis
b= Slope of the consumption function(MarginalPropensity to Consume)
Y=Disposable Income
Aggregate Demand=Total Value of Output
Y=C+IWhere C=Consumption
I= Investment
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Y=C+I ..(1)Substituting value of consumption function in
equation 1
So, Y= Ca+ bY+I
Y-bY= Ca+I
Y= 1 (Ca+I)
1-b
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S=-Ca+ sYE
Income
PlannedSaving andPlannedInvestment
Ca
I
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Now AD=AS
C+I=C+S
We can write as follows
I=SSubstituting saving function in above equation
I=- Ca+(1-b)Y
Y= 1 (Ca+I)
1-b
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1. In an economy, the basic equations are asfollows. The consumption function isC=120+0.80Y and Investment I=250. Find
1. The equilibrium level of income
2. The equilibrium level of consumption3. The equilibrium level of saving
Answers:
1. Y=18502. C=16003. S=250
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1. If in an economy C=450+0.80Y,Investmentis I=540
1. Determine the equilibrium level of income andconsumption
2. Derive the saving function and determine thesavings at equilibrium
3. Determine the equilibrium level of income
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2. In an economy, basic equations are asfollows: the consumption function isC=150+0.80Y and investment I= Rs.180Crore. Find:
1. The equilibrium level of income2. The equilibrium level of income when investment
increases from Rs. 180 Crore to Rs. 200 Crore.
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Low Per Capita Income and Low rate of economicGrowth
High Proportion of people below the poverty line
Low level of productive efficiency due to
inadequate nutrition and malnutrition Imbalance between population size, resources
and capital
Problem of Unemployment
Instability of output of agriculture and relatedsectors
Imbalance in distribution and growinginequalities
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1. Government enterprises2. Price fixation
3. Direct intervention
4.
Indirect intervention5. Control of monopolies
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