Code: ECO-302 Class: BBA/Bcom

Student Id & name : 15185 ( Hassan

Course Name: )
Macroeconomics Duration: One Week(20-04-2020)
Instructor Name: Sheeba Tahir Maximum Marks: 30 marks

I: Choose the most appropriate answer for the following:

i. The gross domestic product is the total ____ produced within a country in a given
time period.
(a) Market value of all final goods and service
ii. The circular flow diagram shows:

(a) The flow between different sectors of the economy

iii.  The four-factor payment are:

a . Wages, rent, interest, and profit

iv. The average income of a country is called
(a) Per capita income

v. GNP is always

(a) Greater than NNP

vi. The term microeconomics and macroeconomics were first given by -----------

(a) Ragnar Frisch

vii. The book “General Theory of Employment, Interest and Money” was published
in----------

(a) 1936

viii. The difference between the income received from abroad for rendering factor
services by the normal residents of the country to the rest of the world and income
paid for the factor services rendered by nonresidents in the domestic territory of a
country is known as-------
(a) Net Factor Income from Abroad

ix. Real and nominal income is calculated respectively at-------------

(a) Current price and Constant Price
(b) Constant price and Current price
(c) Current price and Current price
 (d) Constant price and Constant price.
x. The sum of all kinds of income received by the individuals from all sources is
called---------
(a) Personal Income
(b) Private Income
(c) Personal Disposable Income
(d) None

Part I(b): True and false statements. (Justify your Statement with reason).
I. Price is the main determinant of macroeconomics. ( false the main
determinant of macroeconomics is growth that includes physical capital,
fiscal policy, human capital, trade, demographics, monetary policy and
financial and technological factors.)
II. Classical economists and monetarists emphasize that active role should be
played by the government to control business cycles and achieve
economic stability.
III. Microeconomics and macroeconomics are independent to each other
(false, they are actually interdependent to each other.)
IV. Keynesians believe in a free - market economy. (false, Keynes asserted
that free markets have no self-balancing mechanisms that lead to full
employment.)

Part II: Attempt all Question.

ANSWER NO 1 :

1. Macroeconomics is the branch of economics that deals with the structure, performance,
behavior, and decision-making of the whole, or aggregate, economy.
2. The two main areas of macroeconomic research are long-term economic growth and
shorter-term business cycles.
3. Macroeconomics in its modern form is often defined as starting with John Maynard
Keynes and his theories about market behavior and governmental policies in the 1930s;
several schools of thought have developed since.
4. In contrast to macroeconomics, microeconomics is more focused on the influences on
and choices made by individual actors in the economy (people, companies, industries,
etc.).

Major Concerns of Macroeconomics:

I. Employment and unemployment:

Unemployment refers to involuntary idleness of resources including manpower. If
this problem exists, society’s actual output (or GNP) will be less than its potential
 output. So, one of the objectives of Government policy is to ensure full
employment which implies absence of involuntary unemployment of any type.
II. Inflation:
In flation is a quantitive measure of the rate at which the average price level of a
basket of selected goods and services man econmy increases over a period of
time, Often expressed as a percentage, inflation indicates a decrease in the
purchasing power of a nations currency.

The Trade Cycle:

It refers to periodic fluctuations in the levels of economic or business activities,
i.e., the tendency for output (GNP) and employment to fluctuate over time in a
recurring sequence of ups and downs. The periods of good trade alternate with
periods of bad trade, or, boom periods of high output and high employment
alternate with slump periods of low output and low employment.

In boom periods, employment is low but the rate of inflation is high. In periods of
depression (or recession) unemployment is high and the rate of inflation is
moderate. In macroeconomics we study the causes of business cycles and suggest
remedial measures.

III. Stagflation:

Most modern mixed economics suffer from the disease of stagflation which
implies the co-existence of inflation and unemployment in a stagnant economy.
The trade-off between inflation and unemployment is perhaps the most complex
macroeconomic issue of the day. Every country in the world is now struggling
hard to fight the disease of stagflation.

IV. Economic Growth:

In spite of short-term fluctuations of output that are associated with the trade
cycle, the long-term trend of total output has been upward in most industrially
advanced country. The trend in the nation’s total output over the long period is
known as economic growth. It refers to an expansion of society’s production
capacity such as bringing new land under cultivation or setting up new factories.
Growth is measured by the annual rate of increase of per capita income and is
illustrated by a rightward shift of the production possibility curve.A country seeks
to achieve economic growth mainly for improving the standards of living of its
people. If the rate of economic growth exceeds the rate of population growth,
there is likely to be an improvement in the standard of living for the average
person.

V. The Exchange Rate and the Balance of Payment:

 The balance of payments is a systematic record of all economic transactions
between the members of the home country and the rest of the world in an
accounting year. These transactions are largely, if not entirely, influenced by the
exchange rate. It is the rate at which a country’s economy is exchanged for
another currency (or gold).

The trend in the value of the rupee in terms of two major currencies of the world,
viz., the U.S. dollar and British pound, has been downward in the last two
decades. Economists are always eager to discover the cause and consequences of
such changes.

ANSWER NO 2 :
The circular flow of income or circular flow is a model of the economy in which the major
exchanges are represented as flows of money, goods and services, etc. between economic agents.
The flows of money and goods exchanged in a closed circuit correspond in value, but run in the
opposite direction. The circular flow analysis is the basis of national accounts and hence
of macroeconomics.
The idea of the circular flow was already present in the work of Richard Cantillon. François
Quesnay developed and visualized this concept in the so-called Tableau économique. Important
developments of Quesnay's tableau were Karl Marx' reproduction schemes in the second volume
of Capital: Critique of Political Economy, and John Maynard Keynes' General Theory of
Employment, Interest and Money. Richard Stone further developed the concept for the United
Nations (UN) and the Organization for Economic Co-operation and Development to the system,
which is now used internationally.

Basic diagram of the circular flow of income. The functioning of the free-market
economic system is represented with firms and households and interaction back and
forth.
This graph shows the circular flow of income in a five-sector economy. The flow of
money is shown with purple, and the flow of goods and services is shown with orange.
Money flows in the opposite direction from goods and services.

ANSWER NO 3 :
■
● INFLATION :
Inflation is a quantitive measure of the rate at which the average
price level of a basket of selected goods and services in an economy
increases over a period of time.
1. Explanation :
As Price raise a single unit of currency loses value as its buys fever
goods and services. This loss of purchasing power impacts the general cost
of living for the common public which ultimatelyleads to declearation in
economic growth.inflation in action can be seen in the price of milk. In
1980, a cup of tea cost about $0.25. Ten years later, in1990, $0.45. This
increase is not due to coffee becoming more scarcer, or more expensive to
make. In fact, the opposite is true. Instead, this price reflects the gradual
decrease in the value of money as a result of inflation.
● UNEMPLOYMENT:
 Unemployment is a term referring to individuals who are employable and
seeking a job but are unable to find a job. Furthermore, it is those people
in the workforce or pool of people who are available for work that does
not have an appropriate job. Usually measured by the unemployment rate,
which is dividing the number of unemployed people by the total number
of people in the workforce, unemployment serves as one of
the indicators of an economy’s status. 

● AGGREGRATE DEMAND:

Aggregate demand is an economic measurement of the total amount

of demand for all finished goods and services produced in an economy. 

● AGGREGRATE SUPPLY:

Aggregate supply, also known as total output, is the

total supply of goods and services produced within an economy at a given
overall price in a given period. It is represented by the aggregate supply
curve ,which describes the relationship b/w the price level and the
quantity of output that firms are willing to provide.

ANSWER NO 4 :
Gross Domestic Product (GDP):
GDP is the total monetary or market value of all the finished goods and
services produced within a counry’s borders in a specific time period.As a broad measure of all
domestic production,it functions as a comprehensive scorecard of the country’s economic health.

There are three ways to calculate GDP :

1 . Expenditure Approach
2 . Income Approach
3. Production or Value Added Approach

● Expenditure Approach :
GDP = Consumption + Total Goverment Expenditure + Sum of Country’s Investment
+NetExports

● Income Approach :
GDP : Total National Income + SalesTax + Depreciation + Net Foreign
Factor Income

Production or Value Added Approach :

Value Added : Total Revenue - Value of Intermediate goods

 National Income
National Income is the total value of a country’s final output of all new goods and
services produced in one year.

Concept of National Income :

● Gross Domestic Product

● Gross National Product
● Net National Product
● Personal Income
● National Income
● Dispoable Income
● Per Capita Income

ANSWER NO . 5
The following points highlight the eight major difficulties in the
measurement of national income.
1. Prevalence of Non-Monetized Transactions:
There are certain transactions in India in which a considerable part of output does not come into
the market at all.

For example:
Agriculture in which a major part of output is consumed at the farm level itself. The national
income statistician, therefore, has to face the problem of finding a suitable measure for this part
of output.

2. Illiteracy:
The majority of people in India are illiterate and they do not keep any accounts about the
production and sales of their products. Under the circumstances the estimates of production and
earned incomes are simply guess work.

3. Occupational Specialization is Still Incomplete and Lacking:

There is the lack of occupational specialization in our country which makes the calculation of
national income by product method difficult. Besides the crop, farmers are also engaged is
supplementary occupations like—dairying, poultry, cloth-making etc. But income from such
productive activities is not included in the national income estimates.

4. Lack of Availability of Adequate Statistical Data:

Adequate and correct production and cost data are not available in our country. For estimating
national income data on unearned incomes and on persons employed in the service are not
available. Moreover, data on consumption and investment expenditures of the rural and urban
population are not available for the estimation of national income. Moreover, there is no
machinery for the collection of data in the country.

5. Value of Inventory Changes:

The value of all inventory changes (i.e., changes in stock etc.) which may be either positive or
negative are added or subtracted from the current production of the firm. Remember, if in the
change in inventories and not total inventories for the year that are taken into account in national
income estimates

 6. The Calculation of Depreciation:

The calculation of depreciation on capital consumption presents another formidable difficulty.
There are no accepted standard rates of depreciation applicable to the various categories of
machine. Unless from the gross national income correct deductions are made for depreciation the
estimate of net national income is bound to go wrong.

7. Difficulty of Avoiding the Double Counting System:

The very important difficulty which a calculator has to face in measurement is the difficulty of
avoiding double counting.

For example:
If the value of the output of sugar and sugar cane are counted separately, the value of the
sugarcane utilized in the manufacture of sugar will have been counted twice, which is not proper.
This must be avoided for a correct measurement.

8. Difficulty of Expenditure Method:

The application of expenditure method in the calculation of national income has become a
difficult task and it is full of difficulties. Because in this method it is difficult to estimate all
personal as well as investment expenditures.

1. Suppose you are given the following information about some hypothetical economy and
its national income accounts (which nonetheless closely follows the NIPA data for 2007
III annualized). Use this information to answer the questions that follow. (Amounts are in
billions of dollars).

Indirect Business Taxes $919.0

Corporate profits $1208.9
Corporate profits taxes $469.4
Retained earnings $330.8
Proprietors' income $1038.4
Rental Income $62.1
Net Interest $1171.1
Exports $1685.7
 Net National Product 12380.8
Imports $2380.4
Income Receipts from rest of world $855.6
Income Payments to rest the world $754.9
Government expenditures for Goods and Services $2716.5
Personal Consumption expenditures $9785.7
Gross Private Domestic Investment $2162.9
Statistical Discrepancy 75

(i) Find GDP:

(a) By Income Approach
(b) By Expenditure Approach
(ii) Find GNP, and Differentiate between GDP and GNP.
(iii) Find Depreciation
(iv) Find National Income