ETHIO NATIONAL SCHOOL

2020 G. C 4TH QUARTER ECONOMICS LESSON NOTE FOR GRADE 11

 Dear students: - Copy the note and do the given homework on your exercise book!

Subject: Economics Grade & section:11A

Unit: 7
Main Topic: Calculating GDP
Sub topic/s:
Page range from:

MONDAY, JUNE 1, 2020

Calculating GDP
1. Income method
This method considers all the income earned from factor service such as rent, salary, interest,
profit. And deprecation which means the used capacity of a fixed asset. (tangible property which
can be used for production of goods and services) plus indirect tax(a type of tax added in the price
of goods such as VAT , TOT. . . this type of tax are not paid separately like property tax or profit
tax but added to the price of a product and collected by the seller to be paid to the government)
Please look at the example in page 269
 Compensation of employees 84,000 (salary or wage income made for workers as a fringe
benefit)
 Rental income 9,200
 Interest income 12,100 (from capital usage)
 Profits (proprietor’s income) 30,000 (earned by the business owner after all the costs have
been recovered)
 Depreciation 10,000 (the financial relevance of the capital (machine or other property) left
after deduction of the run-out parts)
 Indirect business taxes 4,000
Adding all the above
84,000+9,200+12,100+30,000+10,000+4,000 = 149 300 Birr GDP

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 2. Expenditure Method
Expenditure Amount
Personal final consumption expenditure (household consumption 12,000 = (4,500+1,500
expenditure for consumer goods) +6,000)
 Durable goods (Expenditure made for the purchase of plant 4,500
assets for home use) 1,500
 Non-durable goods (Expenditure Made to acquire convenience
goods) 6,000
 Services (expenditures made to pay bills and other fees)
Government final consumption expenditure (Cash outflow by the 5440 = (1040+2100
Government) 1040 +2300)
 Federal defense 2100
 Federal non-defense 2300
 State and local governments
Gross fixed capital formation (Gross private Domestic Investment) 7410 = (3,940+2,200+
 Construction Expenditure (cost made for the inputs of constricting) 1 ,270)
 Machinery equipment Expenditure 3,940
(Business fixed investment for producer goods) 2,200
 Changes in inventories (the difference between stored input
initially and current amount of stored input) 1,270

Net Exports -111 = (94-205)

 Exports (the sum of value from export) 94
 Imports (the sum of value from import) 205
Total or GDP 24,739=(12,000+5440
+7410-111)

TUESDAY, JUNE 2, 2020

Problems of measuring GDP
1. Conceptual problem;
 Difficulty of selecting the type of method suitable for a given economic system. All methods
might not work out for a given economy which obviously will have unique nature.
 There is no universally accepted and general consent regarding the meaning of national
income. It depends on the nation’s domestic consideration.

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 Difficulty to decide if an economic activity is productive or not. Ambiguous to decide if they are
productive. For example, Goods and services produced for self-consumption or recreation
(arts) are not assigned with market values (price). It is impossible to count national income
without market value.
 The theories and methods of national income counting lack applicability for all levels of nation’s
economy. Most of the methods are working for developed nations but the economy of
developing nations won’t be bounded under these methods.
2. Statistical (practical) problem
 Non-availability of data
Specially, developing nation face a great deal of data sufficiency to count national income.
Lack of professionals and accuracy of data are major problems of the areas.
 Barter Trade
Barter trade doesn’t need to fix price for products and without price (market value) GDP can’t
be calculated.
 The problem of double counting
Intermediary goods are exposed for double counting which distorts the actual data.
 Production for self-consumption
Producing for personal consumption constraint products to be tagged on price. Without price
(market value) national income can’t be counted.
 Non-maintenance of accounts
Micro-business and self-employed might avoid to register their transaction which create
difficulty to access the necessary data for national income counting based on their personal
contribution.

How to convert Nominal GDP in to real GDP

As you know real GDP is a better to make a year-to-year comparison of changes in the physical
output of goods and services. GDP counts the physical output produced through market value so
real GDP is important. But nominal GDP is limited to show physical (output) change in the
economy because it is biased by varying price(there can be difference between current and
previous prices). A sustained rise in real GNP reflects the economic growth of the country,
whereas a continuous fall in real GDP is an indicator of recession, and depression
In order to know the exact output level, we have to change Nominal GDP in to real GDP.

Real GDP = Nominal GDP 1000

Price Index of Current Year
 Nominal GDP, Year and CPI is given

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Other national Income counting
Net Domestic Product at Market Prices (NDPMP)
Net Domestic Product at Market Prices (NDPMP) is the market value of the goods and
services produced in a given country’s territory during a given year minus depreciation (the
amount ruined out during the operation of a fixed asset or capital)
NDPMP = GDPMP – Depreciation
Example
Take an example form page 269.
GDP = 149,300
Depreciation = 10,000
NDPMP = 149,300-10,000
= 139300
Net National Product at market Prices (NNPMP)
Net National Product is the net market value of all the final goods and services produced by
the normal residents of a country during a year. NNPMP can be obtained by subtracting
depreciation from GNPMP.
NNPMP = GNPMP – Depreciation
Example
Take an example from page 269
NFI = 50 000 Given
GDP = 149,300
GNP = GDP+NFI = 149,300+50 000 = 199300
NNP = 199300-10,000 =
= 189 300
Net National Product at Factor cost (NNPFc)
Net National Product at factor cost is the sum total of net value added at factor cost by all the
normal resident producer enterprises of a country during a year.
NNPFC or NI = NNPMP – Indirect taxes
Example
Take an example form page 269
Indirect tax 4000
NNPFC = 189300-4000
= 185300

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Personal Income (Y)
Personal income is the sum of earned income and transfer income received by consumers
(households) from all sources within and outside the country.
Personal Income (Y) = NI – (Corporate tax + Undistributed profit + All types of transfer
incomes)

NI means net income.

Corporate tax is an income tax paid by the owners of a corporation.so it isn’t going to be added in
the personal income counting.
Undistributed Profit is part of income earned by a firm which is going to be distributed as a
dividend and can’t be counted as personal income since it is income of a company.
Transfer income is a kind of income given for households without producing any output. It includes
pension, subsidy, Safety Net payments . . .
Personal Disposable Income (Yd)
Personal disposable income is that part of personal income which is available to the households
for disposal as they like.
Personal Disposable Income (Yd) = personal income (Y) – personal taxes
Exercise
Given the following information (in millions of Birr)
a. government final consumption expenditure = 1400
b. change in stocks = 210
c. private final consumption expenditure = 820
d .net domestic capital formation = 275
e. exports = 175
f. imports = 225
g. depreciation = 80
h. factor income to abroad = 78
i. factor income from abroad = 194
Find
i. GDPMP by expenditure approach
ii. NFI
iii. GNP
iv. NDP
v. NNP
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 3. Write the relationship between GNPMP and GDPMP in equation form.
4. When is NDP be smaller than NNP?
5. When is NDP be greater than NNP?

WEDNESDAY, JUNE 3, 2020

Development Indicators
Perhaps the best-known measure of economic development is the United Nation’s Human
Development Index (HDI). This takes into account GNI per head, education (as measured by
mean years of schooling and expected years of schooling) and health care (as measured by life
expectancy). These are included as it is thought that people’s welfare is influenced not only by the
goods and services available to them but also their ability to lead a long and healthy life and to
acquire knowledge. The HDI value for a country shows the distance a country has to cover to
reach the maximum value of 1. Countries are divided into very high human development, high
human development, medium human development and low human development. A country’s
ranking by HDI does not always match its ranking in terms of real GDP per head. Indeed, in some
cases there are marked differences. For example, in 2012 Cuba’s HDI ranking was significantly
higher than its GNI per head ranking while Qatar’s GNI per head ranking was significantly higher
than its HDI ranking.
A more recent composite measure is the Multidimensional Poverty Index (MPI). This was
developed in 2010 by the Oxford Poverty and Human Development Initiative and the United
Nations Development Programme. It measures indicators of living standards (cooking fuel,
sanitation, safe drinking water, floor space and assets), education (years of schooling and school
attendance) and health (child mortality and nourishment). The six indicators of living standards are
given a total weighting of 33%, the two indicators of education a total weighting of 33% and
similarly the two indicators of health have a weighting of 33%. A household is considered to be
multi-dimensionally poor if they are deprived in at least 33% of the weighted indicators. This
means a family would be regarded as poor if it has lost a child and has another child who is not
attending school.
GDP and Income Distribution
Challenges of GDP as a tool to measure economy
 How can higher income of GDP record can equally be distributed among the society?
 How does GDP threat the Natural resource?
 What about human development than material development?

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 To overcome some of the questions raised Green GDP is invented.
Green GDP: Green GDP is a GDP which would help attain a sustainable use of natural
environment and equitable distribution of benefits of development.

THURSDAY, JUNE 4, 2020

Chapter 8
Consumption, Saving and Investment
The relationship between income, consumption (expenditure), Saving and Investment
Income, consumption, saving, and investment are closely interlinked. Consumption, saving, and
investment are crucial factors in any country’s economic performance (income, output,
employment, etc.). an economic unit earns income and expend part of it as a consumption
expenditure, some part of the income will be saved. A firm also invests in a business to fulfill the
need of factors of production which is called expenditure. An invested money bring income and
part of it will be saved and the rest re invested in the form of expenditure.
Anthonomus and induced consumptions
consumption is a part of income and directly depends upon income itself. But there is
consumption(expenditure) without income or with zero income which is called autonomous
consumption. Anthonomus consumption can be made by begging or borrowing.
In contrast to this a type of expenditure(consumption) which is dependent with income level is
called Induced consumption.
Relationship between Income and Consumptions
Income (In units of money) Consumption expenditure (In units of money)
0 100
200 200
400 300
600 400
800 500
1000 600

there is always a minimum level of consumption expenditure, even if income is zero. This is why,
at zero income level, consumption expenditure is represented by a positive value 100 units of
money) rather than zero units. The table also shows that, with increases in income, consumption
expenditure also increases but at lesser rate.

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Determinants of Consumption Expenditure
The major determinants of consumption expenditure at individual and national levels are:
1. Money Income: expenditure directly relay on income. Lesser income results lower expenditure
and vice versa.
2. Distribution of Income: Low income earners expend most of their income for basic needs and
left with few or no money to be saved but reach people expend lesser present from their income
and can save more than they expend. Unequal distribution of a nation’s income reduces
consumption expenditure, and equality in distribution of income increases it. If there is equal
distribution of income or narrowed income gap, there will be average income earners in the nation
so they will expend most of their income for consumption as they are not reach who can have
excess money to be saved.

FRIDAY, JUNE 3, 2020

level of Direct Tax

If tax level is rising, an amount of money to be deducted from consumers will be high so
disposable money will be low (Disposable income is the amount of money(salary) on hand after all
the necessary tax, pension and other deductions).
Expectation of the Future
Consumption will be high if we expect price will be high in the coming future.
Rate of Interest
If there is higher interest rate, peoples prefer to save it than expend become expending(investing)
brings less money than interest earning. Lower interest rate initiate peoples to withdraw from
saving(banks) to make expenditure because saving brings lower money in the form of interest
than earning from investment(expenditure).
Level of Wealth
If we see it from national perspective The poor expend high percent of their income but, if we see
the total poorest nations expend less and reach nations expend more money in aggregate.
Consumption Function
shows the relationship between level of consumption and level of income. The consumption
function is also known as propensity to consume.
C = f (Yd)
Where C = consumption expenditure, and
Yd= personal disposable income.

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C = a + bYd, where a is autonomous consumption, b is percentage of income for consumption,
and bYd is induced consumption.
Example: Consider a consumer with a consumption function given by
C = 110 + 0.75Yd
, and disposable income of Birr 4,800. Calculate the consumer’s
a) autonomous consumption
b) induced consumption
c) total consumption
d) saving
Given: Consumption function C = 110 + 0.75Yd
Disposable income = 4,800
( a) Autonomous consumption is the level of consumption when income is zero. Thus,
Autonomous consumption = 110 + 0.75 × 0 = 110
(Autonomous consumption is income independent,0, if we r asked to calculate
autonomous, we have to think of zero income so we replace Yd(income) with zero)
(b) Induced consumption is = Total consumption – Autonomous consumption Induced
consumption = 0.75 × 4,800 = 3,600
(Induced consumption is income dependent can be found by multiplying Yd with given income)
(c) Total consumption =Autonomous consumption + Induced consumption
= 110 + 3,600 = 3,710
(d) Saving = Yd – C = 4,800 – 3,600 = 1,200
S = Yd– bYd
(Saving is the amount of money left after the expenditures are made which is Yd-C, Yd is
disposable income 4800 and consumption(expenditure) is 3600. We take only indused income
since it is dependent in income or Yd)
Level of National Income Consumption
(Yd) (C)
0 50
50 75
100 100
150 125
200 150
250 175
300 200

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 250 Y=C+S
saving C
200
Consumption

150

100 Consumption

50
50 100 150 200 250 300
Income

 Consumption increases with increase in income. When income level is zero, the minimum level
of consumption is Birr 50 million in our hypothetical situation. When income is Birr 100 million,
consumption is also Birr 100 million. When income exceeds Birr 100 million, consumption also
increases, but it lags behind the increase in income.

 Consumption (i.e., autonomous consumption) can never be zero, even if income is zero,
because a minimum level of consumption must be maintained for survival. That is why the
consumption function curve starts from point C and not from zero. In such a situation, the
economy draws on past savings in the absence of current income. In the figure, OC is the
minimum level of consumption.
 The 45° line Yd= C + S is called the expenditure equals income line.
Its significance is that each point on this line shows expenditure equal
to income. Comparing the consumption function curve with the 45° line for any point tells us
whether consumption is equal to, greater than or less than income level.

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