Ans.

Q1) GDP: The gross domestic product or GDP allows the measurement of the
economy size by considering the total amount of services and goods that are produced
within a country’s territory within a specific financial year.
It may be consider the newly- produced services and goods as well only when it is
generated within country borders.
The GDP is calculated in the following way -

GDP = G + I + C + (X – M)
Where,
C = Private consumption
I = Gross investment
G = Government investment or
Government spending
X = Exports
M = Imports
GNP: The gross national product or GNP is the aggregated value of all the goods
and services which are produced by the country’s residents within a particular
financial year.
GNP categorically excludes the income which is generated by foreigners who
are only residing within the territory of
the country.
The GNP is calculated as –

GNP = C + I + G + X + Z
Where,
C = Consumption
I = Investment
G = Government
X = Net exports
Z = domestic resident’s net income
Hence it helps the Rohan to give his first lecture perfectly.

Examples of GNP vs. GDP

The output of a Toyota plant in Kentucky isn't included in GNP, although it's counted in
GDP, because the revenue from the sales of Toyota vehicles goes to Japan, even
though the products are made and sold in the United States. It is included in GDP
because it adds to the health of the U.S. economy by creating jobs for Kentucky
residents, who use their wages to buy local goods and services.

Similarly, the shoes made in a Nike plant in Korea will be counted in U.S. GNP, but not
GDP, because the profits from those shoes will boost Nike's earnings and stock prices,
contributing to higher national income. It doesn't stimulate economic growth in the
United States because those manufacturing jobs were outsourced. Its Korean workers
who will boost their country's economy and GDP by buying local goods and services.
GNP v. GDP
The GDP and GNP differences can be understood from the following points.
Parameters GNP
Concept The gross national product
amounts to the valuation of
such services and goods
produced by a citizen of a
country without any
constraints on
geographical boundaries
Purpose Gross national product is
For measuring all
Production by the
Country’s nationals.
Focus The production made by
the country’s citizens
Irrespective of the
Boundary.
What it seeks to measure Measurement of the
Contribution of its citizens
towards its economy.
Measuring productivity Production is measured on
an international scale.
Exclusion Services and goods which
are produced by
Foreigners residing
within the country is
excluded in the gross
national product.
GDP
The gross domestic
products amounts to the
valuation of such services
and goods which are
produced within the
geographical confines of a
country.
Gross domestic product is
only for measuring
The domestic production
within the geographical
Boundaries of a country.
The production made only
on the domestic
front of a country.
Measurement of the
strength of the
economy of a country.
Production is measured
only on an domestic scale.
Services and goods which
are produced
outside the domestic
economy of a country is
excluded in the gross
domestic product.
Ans.Q2) To find the equilibrium price for computers, the supply is equal to demand:
Supply = Demand
Qs = 120+3p
Qd = 1200-p
120+3p = 1200-p
1200-120 = 3p+p
1080 = 4p
P = 270 Rs
Substituting the equilibrium price into either the demand or supply equation to determine
the equilibrium quantity:
Qd = 1200-p
= 1200 – 270
= 930
Qs = 120+3p
= 120 + 3(270)
= 930
If the price changes to Rs 400 then the following change will happen:
Qd = 1200 – p
= 1200 – 400
= 800
Qs = 120+3p
= 120+3(400)
= 1320
If the price changes to Rs 120 then the following change will happen:
Qd = 1200 – p
= 1200 – 120
= 1080
Qs = 120+3p
= 120+3(120)
 = 480
At equilibrium point the quantity demanded for computers of Teena Ltd is 930 but if the
price increase to 400 Rs then the demand for computer falls to 800 units only and if the
price decrease to Rs 120 then the demand for computers will increase to 1080 units as
there is an inverse relation
At equilibrium point the quantity supply for computers of Teena Ltd is 930 units but if the
price increase to 400 Rs then the supply for computer is of 1320 units and if the price
decrease to Rs 120 then the supply for computers will also decrease to 480 units.
Ans.Q3a) The price elasticity of demand is calculated as the percentage change in
quantity divided by the percentage change in price

 The price decreases from 450 Rs to 350 Rs. Therefore % change = 100/450*100
= 22.222%
 The Quantity rose from 25000units to 35000 units. Therefore % change =
10000/25000*100 = 40%

PED = 40%
22.2%

= 1.8

Therefore, the price elasticity of demand for the firm is 1.8.

Ans.Q3b) The cross elasticity of demand is an economic concept that measures the

responsiveness in the quantity demanded of one good when the price for another good
changes. Also called cross-price elasticity of demand, this measurement is calculated
by taking the percentage change in the quantity demanded of one good and dividing it
by the percentage change in the price of the other good. There exists a high cross
elasticity of demand between new and old cars since the demand for old cars is highly
elastic. Old cars will sell at relatively low prices compared to new cars as they have
been used for a while and this suggests how their demand is highly elastic. An elastic
demand is the type in which the elasticity is greater than one which is an indication of
high responsiveness to changes in prices. Conversely, inelastic demand refers to the
demand whereby elasticity is less than one showing that it has low responsiveness to
changes in prices.
Comparison between price elasticity, income elasticity and cross elasticity
The price elasticity of demand:
The price elasticity is a measure of the responsiveness of demand to changes in the
commodity’s own price. If the changes in price are very small we use as a measure of
the responsiveness of demand the point elasticity of demand. If the changes in price are
not small we use the arc elasticity of demand as the relevant measure. The point
elasticity of demand is defined as the proportionate change in the quantity demanded
resulting from a very small proportionate change in price.

The basic determinants of the elasticity of demand of a commodity with respect to its
own price are:

1) The availability of substitutes; the demand for a commodity is more elastic if there are
close substitutes for it.
(2) The nature of the need that the commodity satisfies. In general, luxury goods are
price elastic, while necessities are price inelastic.
(3) The time period. Demand is more elastic in the long run.
(4) The number of uses to which a commodity can be put. The more the possible uses
of a commodity the greater its price elasticity will be.
(5) The proportion of income spent on the particular commodity.

The above formula for the price elasticity is applicable only for infinitesimal changes in
the price. If the price changes appreciably we use the following formula, which
measures the arc elasticity of demand

The income elasticity of demand:

The income elasticity is defined as the proportionate change in the quantity demanded
resulting from a proportionate change in income.The income elasticity is positive for
normal goods. Some writers have used income elasticity in order to classify goods into
‘luxuries’ and ‘necessities’. A commodity is considered to be a ‘luxury’ if its income
elasticity is greater than unity. A commodity is a ‘necessity’ if its income elasticity is
small (less than unity, usually).

The main determinants of income elasticity are:

1. The nature of the need that the commodity covers the percentage of income spent on
food declines as income increases (this is known as Engel’s Law and has sometimes
been used as a measure of welfare and of the development stage of an economy).
2. The initial level of income of a country. For example, a TV set is a luxury in an
underdeveloped, poor country while it is a ‘necessity’ in a country with high per capita
income.
3. The time period, because consumption patterns adjust with a time-lag to changes in
income.
The cross-elasticity of demand:
The cross-elasticity of demand is defined as the proportionate change in the quantity
demanded of x resulting from a proportionate change in the price of y. The sign of the
cross-elasticity is negative if x and y are complementary goods, and positive if x and y
are substitutes. The higher the value of the cross-elasticity the stronger will be the
degree of substitutability or complementarity of x and y. The main determinant of the
cross-elasticity is the nature of the commodities relative to their uses. If two
commodities can satisfy equally well the same need, the cross- elasticity is high, and
vice versa. The cross-elasticity has been used for the definition of the firms which form
an industry.