Assignment Marks: 30

Instructions:

 All Questions carry equalmarks.

 All Questions are compulsory.
 All answers to be explained in not more than 1000 words for question 1 and 2 and for
question 3 in not more than 500 words for each subsection. Use relevant examples,
illustrations as far as possible.
 All answers to be written individually. Discussion and group work is not advisable.
 Students are free to refer to any books/reference material/website/internet for
attempting their assignments, but are not allowed to copy the matter as it is from the
source of reference.

 Students should write the assignment in their own words. Copying of assignments from
other students is not allowed.

 Students should follow the following parameter for answering the assignment questions.

For Theoretical Answer For Numerical Answer

Assessment Parameter Weightage Assessment Parameter Weightage
Introduction 20% Formula 20%
Concepts and Application 60% Procedure / Steps 50%
related to the question
Conclusion 20% Correct Answer & 30%
Interpretation

1. Rohan is appointed an economics’professor in a reputed university. In his first lecture,

students asked him to elaborate on Gross Domestic Product (GDP) and Gross National
Product(GNP). Help Rohan to prepare his first lecture on the given topic with relevant
example and highlight the differences between the two concepts. (10 Marks)
ANSWER

INTRODUCTION:

GROSS DOMESTIC PRODUCT

The total monetary or consumer value of all finished goods and services produced within the
boundaries of a country over a particular period of time is the gross domestic product (GDP).
It acts as a detailed scorecard of the economic health of a given country as a broad measure of
overall domestic output.
Though GDP is typically calculated on an annual basis, it is sometimes calculated on a
quarterly basis as well. In the U.S., for instance, for each fiscal quarter and even for the
calendar year the government publishes an annualised GDP estimate. The individual sets of
data used in this report are presented in real terms, so that the data is balanced for market
fluctuations and is therefore inflation-net.
GROSS NATIONAL PRODUCT
The gross national product (GNP) is an estimation of the total value of all the final goods and
services generated by the means of production owned by the citizens of the country within a
given time. GNP is generally determined by taking into account the amount of personal
consumption expenditure, private domestic investment, government expenditure, net exports
and any foreign investment income earned by citizens, minus the income earned by foreign
residents within the domestic economy. Net exports represent the difference between what a
country exports minus any imports of goods and services.
For example, the GNP of the United States is $250 billion higher than its GDP due to the high
number of production activities by U.S. citizens in overseas countries.

CONCEPT AND APPLICATION:

 How is GDP calculated?

GDP = Consumption + Investment + Government Spending + Net Exports
or more succinctly as
GDP = C + I + G + NX
Where consumption (C) represents private-consumption expenditures by households and non-
profit organizations, investment (I) refers to business expenditures by businesses and home
purchases by households, government spending (G) denotes expenditures on goods and
services by the government, and net exports (NX) represents a nation’s exports minus its
imports.
 How is GNP calculated?
GNP = GDP + Net factor income from abroad
or
GNP = C + I + G + X + Z
Where, C is Consumption, I is investment, G is government, X is net exports, and Z is net

income earned by domestic residents from overseas investments minus net income earned by

foreign residents from domestic investments.

 Difference

 Net revenue receipts of foreign companies owned by foreign residents producing

products in the studied region. Given that GNP only considers citizens of a country and
their economic results, such companies are not included in its calculation. GDP
calculates economic performance, however, irrespective of the country of residence, so
it includes those companies in its calculation.

 Companies owned by domestic residents producing goods for global consumption.

Think of businesses like Apple that manufacture products for sale in the global market
and often send their profits to places like Ireland that have favourable corporate tax
laws. Since GNP takes into account all the performance of domestic citizens, these
companies are included and their economic activity occurs outside the region.

 Similarly, GNP will still provide net revenue receipts from its residents' overseas
investments, while GDP will not. Conversely, within the boundaries of a nation, GDP
will often include foreign investment, while GNP will not.

CONCLUSION:
The Bureau of Economic Analysis (BEA) measures GDP in the U.S. using data calculated by
surveys of consumers, suppliers, and builders and by looking at trade flows.
Nevertheless, GDP only tests the economic success of the economy of a given country, so this
international operation is not taken into account, nor is the money distributed to foreign
economies. Hence this guide us through the information stating GDP and GNP.
 2. Suppose the demand equation for computers by Teetan Ltd for the year 2017 is given
by Qd= 1200-P and the supply equation is given by Qs= 120+3P. Find equilibrium
price and analyse what would be the excess demand or supply if price changes to Rs
400 and Rs 120. (10 Marks)

ANSWER

At equilibrium price, the quantity demanded is equals to the quantity supplied to the market.
This implies that Demand=Supply,
Qd =Qs

1200-P = 120+3P
Solving the above
4P = 1080
Hence Equilibrium price
P = Rs 270
When price Rises to Rs 400
Qs = 120+(3×400)
Qs = 1320
and
Qd = 1200 - 400 = 800
From the above price Rd 400, we can say that There is more supply than Demand because
the price is high.
When Price rises to Rs 120
Qs = 120+(3×120)
Qs = Rs 480
And
Qd = 1200 - 120 = Rs1080

The above price change implies that there is more demand than supply as the price is low.
 3.a. A business firms sells a good at the price of Rs 450.The firm has decided to reduce the
price of good to Rs 350.Consequently, the quantity demanded for the good rose from
25,000 units to 35,000 units. Calculate the price elasticity of demand. (5 Marks)

ANSWER

INTRODUCTION:
Price elasticity of demand is the estimate of a shift in products requested with the price
adjustment. It is referred to as being elastic if the adjustment is far from the original point; at
the same time, if there is no change in the relationship between purchases and price changes,

we refer to it as being inelastic.

I will use arc elasticity for this question, which is similar to the simpler PED, but adds to the
index problem. Arc elasticity uses a midpoint to calculate the elasticity of a commodity
between the two points of a curve.

 To calculate PED, we first calculate the two midpoints;

(Q 1+Q2)
Midpoint Quantity(Q) =
2
( P 1+ P2)
Midpoint Price(P) =
2
Therefore,
(25000+35000)
Q=
2
=30000
( 450+350)
P=
2
=400

 PED using the ordinary formula:

%Change∈Quantity(Q 2−Q 1) %change ∈Price( P 2−P 1)
PED = ÷
Midpoint Q Midpoint P
(35000−25000) (350−450)
= ÷
30000 400
0.33
=
−0.25
= -1.32
 3.b. “There is a high cross elasticity of demand between new and old cars”. Discuss the
statement by explaining the features of cross elasticity of demand. Also compare and
contrast cross elasticity with other types of elasticities of demand. (5 Marks)

ANSWER

INTRODUCTION:
Cross elasticity of demand tests the degree of responsiveness of the demand for a certain
product to a given change in the price of another product. The principle of cross-elasticity of
demand is used by most businesses in setting the prices at which they offer their goods. Since
the market for old cars is highly elastic, there is a strong cross-elasticity of demand between
new and old cars. Compared to new vehicles, old cars can sell at comparatively low prices
since they have been used for a while and this shows how extremely elastic their market is. An
elastic demand is the type of elasticity that is greater than one that is an indication of a high
reactivity to price changes. Inelastic demand, on the other hand refers to demand where
elasticity is less than one, suggesting poor responsiveness to price changes.

CONCEPT AND APPLICATION:

 Income Elasticity of Demand

The income elasticity of demand is the percentage change in quantity demanded divided by

the percentage change in income, as follows:
Percent Change∈Quantity Demanded
Income Elasticity of Demand =
Percent Change∈Income

 Cross-Price Elasticity of Demand

The cross-price elasticity of demand is the percentage change in the quantity of good A that is
demanded as a result of a percentage change in the price of good B, as follows:
Percent Change∈Qd of Good A
Cross-Price Elasticity Of Demand =
Percent Change∈PriceOf Good B

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