1.

Gross domestic product (GDP): is defined as the total market value of all final
goods and services produced within a country in a given period (say a quarter or a year).
o It counts all of the output generated within the borders of a country.
o GDP is composed of goods and services produced for sale in the market and also
includes some nonmarket production, such as defense or education services provided by
the government.
o Not all productive activity is included in GDP.
o Unpaid work (such as that performed in the home or by volunteers) and black-market
activities are not included because they are difficult to measure and value accurately.
For example, that a baker who produces a loaf of bread for a customer would contribute to GDP,
but would not contribute to GDP if he baked the same loaf for his family (although the
ingredients he purchased would be counted).
o GDP takes no account of the “wear and tear” on the machinery, buildings and so on
(capital goods) that are used in producing the output.
GDP = private consumption+ gross private investment+ government investment+ government
spending+(Export-Import)
GDP= C+I+G+(X-M)
where
C: private consumption
I: gross private investment
G: government investment
X: export
M: import

GDP can be of two types:

• Nominal GDP (Current GDP)
• Real GDP (Constant GDP)

• Nominal GDP (Current GDP): Is the face value of output, without any adjustment of
inflation.
• Real GDP (Constant GDP): It is the value of output adjusted for inflation or deflation
(price change).

GDP can be measured by three methods:

 1) Production/Output method: It sums the “value added” at each stage of
production, where value added is defined as the total sales less the value of
intermediate inputs in the production process. It measures the market value of all
the final goods and services produces within the borders of the country.
For Example: Flour would be an intermediate input and the bread final product; or an
architect services would be an intermediate input and building the final product.

GDP = Real GDP (GDP at constant price)-Taxes+ Subsidies.

2) Expenditure method: It sums up the value of purchase made by the final users.
This measures the total expenditures made by all the entities on goods and
services within the domestic boundaries of a country.
For Example: The consumption of food, televisions and medical services by households;
the investments in the machinery by companies; and the purchase of goods and services
by the government and foreigners.
GDP = C+ I+ G+(X-M)

C: Consumption Expenditure
I: Investment Expenditure
G: Government Spending
X: Export
M: Import
X-M: Net export

3) Income method: It sums up the income generated by production. It measures the

total income earned by the factors of production that is capital and labour within
the domestic boundaries of a country.
For Example: The compensation employees receive and the operating surplus of companies.
GDP = GDP at factor cost+ Taxes – Subsidies.

• GDP is the most commonly used measure of the economic growth of a country.
• GDP growth is refers to the percentage change in real GDP.

o In India, contribution to GDP is mainly divided into three broad sectors:

agriculture and allied services, industry and service sector.
o In India, GDP is measured at market prices and the base year is 2011-12.

GDP at market price = GDP at factor cost + Indirect taxes – Subsidies

Limitations of GDP:
GDP is a useful indicator of a nation’s economic performance, and it is the most commonly used
measure of wellbeing. However, it has some major limitations, including:
▪ The exclusion of non-market transactions.
▪ The failure to account for or represent the degree of income inequality in the society.
▪ The failure to indicate whether the nation’s rate of growth is sustainable or not.
▪ The failure to account for the cost imposed on human health and the environment of
negative externalities arising from the production or consumption of the nation’s output.
▪ Treating the replacement of depreciated capital, the same way as the creation of new
capital.

Gross National Product (GNP): It is the total value of all finished goods and services produced
by a country’s citizens in a given financial year, irrespective of their location. GNP also
measures the output generated by the country’s businesses located domestically or abroad.
For Example: If an Indian-owned company has a factory in United States, the output of the
factory would be included in U.S. GDP, but in Indian GNP.
GNP = GDP+ Net factor income from Abroad
GNP = C + I + G + X + Z
Where
C: private consumption
I: gross private investment
G: government investment
X: Net export
Z: Net income earned by domestic residents from overseas investments minus net income earned
by foreign residents from domestic investments.
Although GNP reflets the financial standing of a nation, GNP is not an accurate measure of
economic health because:
o GNP is not as commonly used as GDP as a measure of a country’s economic growth.
o It gives a slightly inaccurate picture of how domestic resources are used.
o GNP is also affected by the changes in the country currency exchange rates.
o It is not a good gauge of whether the economy is growing or contracting.
GNP Per Capita: GNP per capita is measurement of GNP divided by the number of people in
the country. That makes it possible to compare the GNP of countries with different population
sizes.
Difference between GDP and GNP:
GDP
GDP is a reflection of
• Efficiency in Resource utilization
• Stability of Government
• Functioning of the Institutions of the
Nation
Includes income of foreign multinationals
It is used in context to understand the overall
economic health of the country
It is used to measure the size of the local
economy.
Increase in exports leads increase in GDP.
When GDP grows faster than GNP, it denotes
that the nation is advancing in the economic
and technological arena (Possibly)
Since it revolves around one particular
country, it has become an important measure
for major economies of the world, to assess
the internal development.
2. Qd= 1200-P
Qs= 120+3P
Equilibrium Price & Quantity is
1200-P = 120+3P
1200-120 = 3P+P
1080 = 4P
P= 1080/4
GNP
GNP is reflection of
• Distribution of Resources over the
Earth
• Skill set of People
• Regional Imbalances
Excludes income earned by the multinational
when profit is sent back to other country.
It is used in context to gauge the contribution
by the residents of the country.
It reflects the overall economic strength of the
country
Increase in exports leads increase in GNP
But; depends upon the nationality of the
company.
When GNP grows faster than GDP, it denotes
a possible brain drain
It is generally used by small countries,
because they usually lack resources, to
generate employment for all its people.
P= 270
Quantity is
Qd = 1200- 270

Qd = 930

Excess demand and Supply:

If P = 400
Qd = 1200-400
Qd = 800
Qs = 120 + 3(400)
= 120 + 1200
Qs = 1320
Es = 1320-800

Es = 520
If P = 120
Qd = 1200 – 120
Qd = 1080
Qs = 120 + 3(120)
= 120 + 360
Qs = 480
Ed = 1080-480

Ed = 600
Where
Ed: Excess demand
Es: Excess supply
3a. Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price

𝑑𝑄 𝑃
ep = ×
𝑑𝑃 𝑄
Where,
ep= Price elasticity of demand
P = Initial Price
dP = Change in price
Q = Initial quantity demanded
dQ = Change in quantity demanded

P =450
dP = 100 (450 – 350 = 100)
Q= 2500 units
dQ= 10,000 (3500-2500)
By substituting these values in the above formula, we get:

10,000 450
ep = ×
100 25,000

45,00,000
ep =
25,00,000
9
ep =
5

ep = 1.8
Thus, the absolute value of price elasticity of demand is greater than 1.

3b. Cross Elasticity of demand is defined as the proportionate change in the quantity
demanded of good X as a result of change in the price of related good Y.
 ec = Percentage change in quantity demanded of good X
Percentage change in price of good Y

𝑑𝑄𝑋 𝑃𝑌
ec = ×
𝑑𝑃𝑌 𝑄𝑋
Here,

ec = Cross elasticity of demand

QX = Original quantity demanded of good X
dQX = Change in the quantity demanded of good X
PY = Original price of good Y
dPY = Change in the price of good Y
Cross elasticity of demand can be of three types:
• Positive Cross Elasticity of demand: When an increase in the price of good Y results in
the increase in the quantity demanded of good X and vice versa, the cross elasticity of
demand is said to be positive.
o Cross elasticity of demand is positive in case of substitute goods.
o If cross elasticity of good is greater than Zero, the good is substitute.

𝑑𝑄𝑋 𝑃𝑌
ec = × >0
𝑑𝑃𝑌 𝑄𝑋
For example, increase in the quantity demanded for the tea with the increase in the price of
coffee.
• Negative Cross Elasticity of demand: We hen an increase in the price of good Y results
in the decrease in the quantity demanded of good X and vice versa, the cross elasticity of
demand is said to be negative.
o Cross elasticity of demand s negative in case of complementary goods.
o If cross elasticity of good is less than Zero, the good is complementary.

𝑑𝑄𝑋 𝑃𝑌
ec = × <0
𝑑𝑃𝑌 𝑄𝑋
For example: decrease in the quantity demanded of butter/jam with the increase in the price of
bread.
• Zero Cross Elasticity of demand: When a proportionate change in the price of good Y
does not bring any change in the quantity demanded of good X, the cross elasticity of
demand id said to be zero.
o Cross elasticity of demand is zero in case of independent goods.
o If cross elasticity of good is equal to zero, the good is independent.

𝑑𝑄𝑋 𝑃𝑌
ec = × =0
𝑑𝑃𝑌 𝑄𝑋
➢ 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.