1st assignment

Submitted by: Asad Danish Siddiqui

1st Assignment

Submitted to:Mr. Faisal Sultan Qadri

Course InstructorECONOMICS ANALYSIS FOR MANAGEMENT

IQRA University Gulshan CampusKarachi

Submitted by:Asad Danish Siddiqui

1462

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1. Explain why an economy’s income must equal its

expenditure?

Economy’s Income equal to its expenditure because of

house hold buy goods and services from firm to fulfill its

needs from firms, and these expenditures flow through the

markets for goods and service. The firm gets the money

after selling the goods and services to household and uses

this for to pay workers’ wages, landowners’ rent, and firm

owners’ profit. This income flows through the markets for

the factor of production (Land, Labor, Capital and

entrepreneur) or to whom who provided their services for

the production of goods.

In this scenario money flows continuously from

households to firms and then back to households.

2. Which contributes more to GDP—the production of

an economy car or the production of a luxury car?

Why?

Ans: GDP is measure by Market prices because of market

prices measure the amount people are willing to pay

for different goods. So the production of a luxury car

contributes more to GDP than the production of

economy car because the market price of luxury car is

higher than the price of economy car.

3. A farmer sells wheat to a baker for $2. The baker uses

the wheat to make bread, which is

sold for $3. What is the total contribution of these

transactions to GDP?

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Ans: when farmer sells wheat to baker $ 2 and baker uses

wheat to make bread and sold in market $ 3, so the

total contribution of this transactions to GDP is $ 3

because baker purchase wheat from farmer $2 and

further processed it and sold in the market $3, so $3 is

the market value of bread(final goods).

4. Many years ago Peggy paid $500 to put together a

record collection. Today she sold her

albums at a garage sale for $100. How does this sale

affect current GDP?

Ans: The sale of used records does not affect the current

GDP because it is not a part of current

Production where as by definition GDP measure

market value of all the goods produced in a country

within a year.

5. List the four components of GDP. Give an example of

each.

National Income equation or GDP is Y= C+I+G+NX

so the four component of GDP are

C=Consumption: when household purchases the goods

or services he is involve in consumption pattern for

example purchase of new car.

I=Investment: when households or firms invest money

somewhere for the business purpose in order to make

return in his investment. For example: purchases of

raw material by a business.

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G=Government: All government Income and

Expenditure such that purchases of Military

equipment.

NX= Net Export: when selling the goods and services

outside the geographic boundary such that sale of

wheat to other country in the world.

6. Why do economists use real GDP rather than nominal

GDP to gauge economic well-

being?

Ans: Economists use real GDP rather than nominal GDP to

gauge economic well-being because real GDP is not

affected by changes in prices, so it reflects only

changes in the amounts being produced. You cannot

determine if a rise in nominal GDP has been caused by

increased production or higher prices.

7. In the year 2001, the economy produces 100 loaves of

bread that sell for $2 each. In the year 2002, the

economy produces 200 loaves of bread that sell for $3

each. Calculate nominal GDP, real GDP, and the GDP

deflator for each year. (Use 2001 as the base year.) By

what percentage does each of these three statistics rise

from one year to the next?

Year Nominal GDP Real GDP GDP Deflator

2001 100 x $2 = $200 100 x $2 = $200 ($200/$200) x 100 = 100

2002 200 x $3 = $600 200 x $2 = $400 ($600/$400) x 100 = 150

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Ans: The percentage change in nominal GDP is (600 −

200)/200 x 100 = 200%. The percentage change in

real GDP is (400 − 200)/200 x 100 = 100%. The

percentage change in the deflator is (150 − 100)/100 x

100 = 50%.

8. Why is it desirable for a country to have a large GDP?

Give an example of something that would raise GDP

and yet be undesirable.

Ans: It is desirable for a country to have a large GDP

because people could enjoy more goods and services.

But GDP is not the only important measure of well-

being. For example, laws that restrict pollution cause

GDP to be lower. If laws against pollution were

eliminated, GDP would be higher but the pollution

might make us worse off. Or, for example, an

earthquake would raise GDP, as expenditures on

cleanup, repair, and rebuilding increase. But an

earthquake is an undesirable event that lowers our

welfare.

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