NMIMS Global Access School for Continuing Education

(NGA-SCE)
Course: Business Economics

Answer 1:-

 GDP: GDP stands for Gross Domestic Production is the final and total value
of the goods and services produced within the geographic boundaries of a
country during a specified period of time, normally a year.

For example:

If Apple manufactures its mobile phone worth $1 million within India, then this $1
million will be counted in India’s GDP and on the other hand, if the US office of
Infosys created software worth $1 million, then it will be counted in US’ GDP. It is
the domestic boundary that distinguish the GDP.

GDP growth rate is an important indicator of the economic performance of a country.

For instance, countries with higher GDPs have citizens with higher incomes and
better standards of living. Through measurement of the status of the economy,
economists can determine whether the economy of a country is growing or going
through a recession. It functions as a comprehensive scorecard of a given country’s
economic health.

There are two methods of calculating GDP

1. Expenditure Approach
2. Income Approach

Expenditure Approach takes into account adding up all the amount spent on goods
and services during the period.

Income Approach: Under the Income Approach, the GDP is calculated by adding up
three factors

GDP = National Income + Statistical Discrepancy + Capital Consumption Allowance

GNP: GNP, stands for Gross National Production is the measurement of the monetary
value of all goods and services by the people and companies of a country regardless
of where this value was created. In other words, GNP is GDP plus net factor income
from abroad.

Taking the same example discussed previously,

If Apple manufactures its mobile phone worth $1 million within India, then this $1
million will be counted in India’s GDP and US’ GNP. On the other hand, if the US
office of Infosys created software worth $1 million, then it will be counted in US’
GDP and India’s GNP.

It is commonly used statistic for National Income and is slightly different from the
GDP.
To make it understand better, GNP of a country is shown using following formula:-

Difference between GDP and GNP:

GDP and GNP are related concepts in the sense that they both measure the living
standards of different countries. The significant difference between GDP and GNP is
that GDP only measures the value of goods and services produced within the borders
of a nation. In contrast, GNP measures the value of goods and services produced by
residents of a country regardless of the geographical location. GDP operates on Local
scale whereas, GNP operates on International Scale.

Another difference is that GDP includes goods and services produced by foreigners in
the local economy, but GNP excludes them. For example, several foreign companies
in the US produce goods and services in the US and revert the incomes to domestic
residents. Many US companies produce goods and services in foreign countries and
earn profits for their residents.
To conclude, both GDP and GNP are important for a country’s economic
performance as GDP highlights the strength of the country’s economy and GNP
highlights the resident’s contribution to the development of the economy but still
Economists and investors are more concerned with GDP than with GNP because it
provides a accurate picture of a nation’s total economic activity regardless of
country-of-origin, and thus offers a better indicator of an economy’s overall health.

Answer 2

Given: Demand equation for computers by Teetan Ltd for the year 2017

Qd= 1200-P (1)

& Supply equation,

Qs= 120+3P (2)

Where P is equilibrium Price.

Formula used: Equation of Market Equilibrium i.e.

Qd = Qs (3)

Solution: putting equation 1 and 2 in 3

1200- P = 120+3P
1200-120 = P+3P
1080 = 4P
P = 1080/4
P = Rs. 270.
Equilibrium price is Rs. 270.

Now, according to question,

Case I
When price Rises to Rs. 400
Qs = 120 + (3x400)
Qs = 120 + 1200
Qs = 1320
and

Qd= 1200- 400

Qd= 800

From the above price, we can say that there is more supply than demand because the
price is high.

Case II
When price falls to Rs. 120
Qs = 120 + (3x120)
Qs = 480

And

Qd= 1200-120
Qd= 1080

From the above price change it implies that there is more demand than supply as the
price is low.

Answer 3(a):

Given,
Initial Price (P)= Rs. 450
New Price (P1) = Rs. 350
Initial Quantity demanded (Q) = 25,000 units
New Demand (Q1)= 35,000 units

Formula Used :-
Price elasticity of Demand = percentage change in quantity demanded
Percentage change in price

ep = ΔQ x P (1)
ΔP Q

Solution:-

ΔQ = Q1-Q = 35,000-25,000 = 10,000

ΔP = P- P1 = 450-350 = 100

Putting values in equation (1)

ep = 10,000 x 450
100 25,000
 ep = 18%

Pure elasticity of demand is 18%.

3(b):

Cross elasticity of demand is an economic concept which measures the degree of

responsiveness of the demand for a certain product to a given change in the price of
another product. In other words, Cross elasticity of demand (ec) measures the
percentage change in quantity demand for a good after a change in the price of
another. It can be measured as :
ec = percentage change in quantity demanded of good X
Percentage change in price of good Y

Mathematically,
ec = ( ΔQx / Qx)
( ΔPy/Py)

With the consumption behavior being related, the change in the price of a related
good leads to a change in the demand of another good. Related goods are of two kinds,
i.e. substitutes and complementary goods. In case the two goods are not related, the
Coefficient of Cross Elasticity is zero.

In case the two goods are substitutes for each other like tea and coffee, the cross price
elasticity will be positive, i.e. if the price of coffee increases, the demand for tea
increases. On the other hand, in case the goods are complementary in nature like pen
and ink, then the cross elasticity will be negative, i.e. demand for ink will decrease if
prices of pen increase or vice-versa.
Now, in case of old and new cars (substitute goods) the cross elasticity of demand will
be positive. Old cars will be sold at relatively low prices and their demand will be
increased compared to new cars as their price will be increased this suggests how their
demand is highly elastic and positive.

Comparing Cross elasticity of demand with other types of elasticity’s of demand

i.e. Price elasticity of demand and Income elasticity of demand:

In Price elasticity of demand there is percentage change in the quantity demanded of a

product due to change in the price of the same product while in Cross elasticity of
demand there is percentage change in the quantity demanded of a product due to
change in the price of the another product and the other kind of elasticity i.e. income
elasticity , income of consumers plays the part in place of price and leads to the
definition that is the percentage change in quantity demanded due to percentage
change in income.
To conclude that, Elasticity of demand can be explained using any of these three main
categories in response to its determinants, such as the price of the product, price of
substitute, and income of consumers.