Submitted By: Sohail Ahmad

Class: BBA 2nd

Section: B
Subject: Macroeconomics
Submitted to: Sir Azhar Tanoli
 Q1. Methods for Measuring National Income

The following points highlight the three methods for measuring national income. The methods
are: 1. The Product (Output) Method 2. The Income Method 3. The Expenditure Method.

1. The Product (Output) Method:

The most direct method of arriving at an estimate of a country’s national output or income is to
add the output figures of all firms in the economy to get the total value of the nation’s output.
The outputs can be grouped into certain product categories corresponding to industries or to
sectors (such as the primary sector, secondary sector and the tertiary sector).

Problems:
When we use the output approach, one major problem arises. This is known as the problem of
double counting. It arises due to the fact that the industry’s output is often the input of another
industry. This is why when we add up the values of all sales, the same output is counted again
and again as it is sold by one firm to another. This problem is avoided by using the concept of
‘value added’, which is the difference between output value and input at each stage of
production.

In other words, each firm’s value added is the value of its output minus the value of the inputs
that it purchases from other firms. Thus, an automobile manufacturing company’s value added is
the value of its output (i.e., the market value of cars) minus the value of tyres and tubes, glass,
steel batteries it buys from other firms as also the values of any other inputs, such as electricity
and fuel oil that it purchases from other firms.

As Lipsey has put it, “A firm’s output is defined as its value added; the sum of all values
added must be the value, at factor cost, of all goods and services produced by the
economy”.
While referring to the concept of value added economists draw a distinction between
intermediate goods (like tyres and types which are used as inputs into a further stage of
production) and final goods that are the outputs of the economy after eliminating all double
(multiple) counting and are used for consumption and not for further production.

In our example, tyres and tubes, glass, steel, electricity were all intermediate goods used at
various stages in the production process while cars were final goods. In fact, all investment
products used at various stages in the process lead to the final produce, car.
In short, the output approach measures national output called gross domestic products (GDP) in
terms of the values added by each of the sectors of the economy. To avoid the problem of double
or multiple counting we must either use the value added method or count the total value of all
final products.

Exports:
If we use the value added method of estimating national output, we have to include exports but
exclude imported materials and services. Imports are automatically excluded since we only
record the values added in this country. This will give us the GDP. In general, the GDP is
measured at market prices, giving the market value of all output. To this, we must add (or from
this we must subtract) the net factor property.

Income from Abroad:

What is the gross national product? GNP is the name we give to the total rupee value of the final
goods and services produced within a nation during a given year. It is the figure one arrives at
when one applies the measuring rod of money to the diverse goods and services—from computer
games to machine tools—that a country produces with its land, labour, and capital resources and
it equals the sum of the money values of all consumption and investment goods, government
purchases, and net exports to other countries.

GNP is used for various purposes, but the most important one is to measure the overall
performance of an economy.

The gross domestic product (or GDP) is the most comprehensive measure of a nation’s total
output of goods and services. It is the sum of the dollar values of consumption, gross investment,
government purchases of goods and services, and net exports produced within a nation during a
given year.

2. The Income Method:

The second approach is to measure incomes generated by production. The main items of income
are shown in Table 1.

Income from employment (item no. 1 in the Table) is wages and salaries. Income of self-
employed persons (item number 2) includes both wages and return on capital owned by self-
employed persons (who are treated as firms in microeconomics). Item number 3 is to be
interpreted in a broad sense. It includes not only the rent of land but also the rent of buildings,
plus royalties earned from patents and copyrights. Thus, it is a partly of return to land and partly
a return to capital. Item number 4 is the major part of return on capital to the private sector.

Likewise, item number 5 is the major part of the return to capital for the public sector. Item
number 6 is depreciation which is the reduction in the value of capital goods due to their
contribution to the production process. Depreciation or capital consumption allowance represents
that part of the value of output which is not earned by any factor but is the value of capital used
up in the process of production. This depreciation is to be treated as part of the gross return on
capital.

Stock appreciation:
Item number 8 involves stocks and its appreciation. The first one is concerned with the valuation
of stock of goods produced but not sold in the same year. These are valued at market prices. This
creates a problem in the sense that there is need to record as part of current output (and income)
the profits that will be received by the firm only when, and if at all, the goods are sold. Thus, if
aggregate inventories of Indian companies go down, national income will raise.

In a year of inflation, it is necessary to make an adjustment for the purely monetary changes in
the value of stocks. It is so because a rise in prices increases the value of existing stocks even
when there is no change in their volume. As G.F. Stanlake has put it, “In order to obtain an
estimate of the real changes in stocks it is necessary to make a deduction equal to the
‘inflationary’ increase in value.”
This deduction is treated as stock appreciation in the national income tables (see Table 1). Thus,
in order to avoid distortions caused by stock appreciation in an inflationary period, a correction
has to be made to eliminate changes in the value of stocks due to price changes alone.

As Lipsey has put it, changes in stocks only contribute to changes in GDP when their physical
quantities change. The correction for the change in the value of existing stocks yields GDP,
valued at factor cost and calculated from the income side of the economy. See Fig.1.

In short, the income approach measures GDP “in terms of the factor-in- come claims
generated in the course of producing the total output.”
Transfer Income:
When we use the income method we have to exclude all transfer incomes such as unemployment
benefit, widow pension, child benefits or even interest on government bonds. These are transfer
incomes since they are not payments for services rendered — there is no contribution to current
real output by the recipients.

Thus, while using the income method we must only take into account those which have been
earned for services rendered and in respect of which there is some corresponding value of output.
Interest paid on government bonds is to be excluded for a simple reason.

The government imposes taxes on some people to pay interest to others. But, the total output (or
income) of society does not increase in the process. We may also refer to private transfer in this
context. If you receive a gift from your father who is also a resident of India, India’s national
income will remain unchanged.

Disposable Income:
Factor incomes are normally recorded gross (i.e., before taxes are paid), because this is the
measure of the factors’ contribution to output. If we subtract all direct taxes as also provident
funds contributions and interest paid by individuals on loans (say to HDFC or to Citi Bank credit
cards) from national income we arrive at disposable income. It is so called because people can
dispose it off as they wish.
 Q2. Function of Commercial Bank

The functions of commercial banks are classified into two main division.

(a) Primary functions –

 Accepts deposit – The bank takes deposits in the form of saving, current, and fixed
deposits. The surplus balances collected from the firm and individuals are lent to the
temporary required of commercial transactions.

 Provides Loan and Advances – Another critical function of this bank is to offer loans
and advances to the entrepreneurs and businesspeople and collect interest. For every
bank, it is the primary source of making profits. In this process, a bank retains a small
number of deposits as a reserve and offers (lends) the remaining amount to the borrowers
in demand loans, overdraft, cash credit, and short-run loans etc.

 Credit Cash- When a customer is provided with credit or loan, they are not provided
with liquid cash. First, a bank account is opened for the customer and then the money is
transferred to the account. This process allows a bank to create money.

(b) Secondary functions –

 Discounting bills of exchange – It is a written agreement acknowledging the amount of

money to be paid against the goods purchased at a given point of time in future. The
amount can also be cleared before the quoted time through a discounting method of a
commercial bank.

 Overdraft Facility – It is an advance given to a customer by keeping the current account
to overdraw up to the given limit.

 Purchasing and Selling of the Securities – The bank offers you with the facility of
selling and buying the securities.
 Locker Facilities – Bank provides lockers facility to the customers to keep their valuable
belonging or documents safely. Banks charge a minimum of an annual fee for this
service.

 Paying and Gather the Credit – It uses different instruments like a promissory note,
cheques, and bill of exchange.
 Q3. Causes of Inflation In Pakistan

Inflation is at its peak all over the world and there are different reasons for it. In the case of
Pakistan, it is the result of monetary phenomenon. The reason is that excess money supply
growth in Pakistan has basically enhanced inflation in Pakistan. According to economic policy
announced in Pakistan, the CPI of Pakistan dropped to 19.1% in March 2009 as compared to
25% in August 2008.

For much of Pakistan’s history, inflation has been moderate, with two noticeable exceptions:
1972-76 and 2008-14, both of which coincided with record-high international oil prices; and
followed/ accompanied public or private spending booms. Although inflation has picked up in
the past few months and is now in the upper single digits, its level is still low by recent historical
standards.

Given this, the key policy issues for inflation management are: avoiding the big spikes (that take
inflation above the desirable range); and ensuring that the poor are well protected against
inflation. On the former, we note that there are several (not one) drivers of inflation:

The first is money growth. For a fixed supply of goods, more money in circulation means higher
prices. Monetary loosening can happen due to structural factors like fiscal dominance, where the
central bank is forced to print money to finance fiscal deficits; and/ or cyclical surges in capital
inflows, and the accompanying credit/ real estate booms.

Fiscal dominance has been a perennial problem in Pakistan, as evinced by the strong co-
movement of inflation and State Bank credit to government over the past 15 years (only Egypt is
worse in this regard). Two things can help fix it: a rise in the tax-to-GDP ratio so that there is a
buffer in public finances; and greater de jure and de facto independence for the State Bank
(progression on this has been quite uneven).

In Pakistan the main reason of inflation is the increase in the prices of regular items, such as
wheat, sugar, ghee and other items. The government has totally failed to control the prices of
these items. Petrol price hikes is the second main cause. When oil prices are increased it affects
prices of its complementary goods too. Such as transportation fares, etc. Thirdly, most of the
industries are closed due to government policies creating unemployment.
Q4. Suppose the Initial Position in economy n= 200(Minut) v=5, T=50, Find the general
price andmalue of money if in to same and handed? Where P= general Price.

Equation of Exchange

Mv
P=
T
or PT = Mv

So as given M=200 M

V= 50

T = 50 nit

Mv
P= T

( 200 ) (5)
P= 50

( 200 ) (5)
P= 50

1000
P= 50

P= 20

If in is double price level is double which means that the value of money has fallen to one half.