Business Economics

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This document provides study material and answers to questions related to Business Economics. It covers topics such as GDP, inflation, unemployment, and more. It also includes explanations and examples to help improve understanding of economic concepts.
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Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
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1BUSINESS ECONOMICS
Table of Contents
Answer to question 1.......................................................................................................................2
a) GDP in income method...........................................................................................................2
b) GDP in expenditure method....................................................................................................2
c) Gross National Expenditure (GNE).........................................................................................2
d) Net Domestic Product (NDP)..................................................................................................2
e) GDP vs NDP............................................................................................................................3
f) Gross National Product (GNP)................................................................................................3
g) Net National Product (NNP.....................................................................................................3
h) Current Account Balance (CAB)............................................................................................3
i) Gross National Saving (GNS)..................................................................................................4
j) National saving.........................................................................................................................4
k) Estimation of domestic consumption......................................................................................4
l) New GDP.................................................................................................................................5
Answer to question 2.......................................................................................................................6
a) Demand-pull and cost-push inflation......................................................................................6
b) Causes of demand-pull and cost-push inflation......................................................................7
Answer to question 3.......................................................................................................................8
a)Zero unemployment target........................................................................................................8
b) Unemployment in classical model..........................................................................................9
c) Structural and cyclical unemployment....................................................................................9
Answer to question 5.....................................................................................................................10
a) Improvement in marketing and selling skills of firm managers............................................10
b) Increase in personal income tax............................................................................................10
c) Increase in export...................................................................................................................11
d) Destruction of capital stock...................................................................................................12
Answer to question 6.....................................................................................................................13
a)Advantages and disadvantages of using CPI..........................................................................13
b) Inflation: winners and losers.................................................................................................14
References......................................................................................................................................15
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2BUSINESS ECONOMICS
Answer to question 1
a) GDP in income method
GDP=Return ¿ labor+ profit of firms+other factors rental
¿ 2651+1687+ 482
¿ $ 4820 billion
b) GDP in expenditure method
GDP=Consumption expenditure+ Investmentexpenditure+Government expenditure+ ExportImpor
¿ 3115+785+210+585+ 690565
¿ $ 4820 billion
c) Gross National Expenditure (GNE)
GNE=Consumption+Government + Investment
¿ 3115+210+585+785
¿ $ 4695 billion
d) Net Domestic Product (NDP)
Net Domestic Product ( NDP )=GDPconsumption of ¿ capital
¿ 4820320
¿ $ 4500 billion
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3BUSINESS ECONOMICS
e) GDP vs NDP
One significant difference between GDP and NDP is that NDP incorporates the impact of
consumption of fixed capital while GDP does not. If there is an increase in GDP along with a
higher depreciation of capital then increased GDP does not mean a higher living standard.
Realizing this, NDP is often said to be a better welfare measure relative to GDP (Stiglitz, 2015).
f) Gross National Product (GNP)
GNP=GDPnet factor income paid abroad
¿ 482034
¿ $ 4786 billion
g) Net National Product (NNP)
NNP=GNPconsumptionof ¿ capital
¿ 4786320
¿ $ 4466 billion
h) Current Account Balance (CAB)
CAB=Exportimportfactor payment abroad
¿ 69058534
¿ $ 91 billion
i) Gross National Saving (GNS)
GNS=GNICG
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4BUSINESS ECONOMICS
¿ $ 4786$ 3115$ ( 585+210 )
¿ $ 4786$ 3115$ 795
¿ $ 876 billion
j) National saving
Given a tax revenue of $17 billion, the national saving can be computed as
National saving=Private saving+Public saving
¿ ( Y T C ) + ( T G )
¿ ( $ 4820$ 17$ 3115 ) + ( $ 17$ 795 )
¿ $ 1668$ 778
¿ $ 890 billion
k) Estimation of domestic consumption
Suppose, the standard consumption function is of the following form
C=a+ bY
a: Intercept
b: slope of consumption line or MPC
Given Y = $4820, b= 0..63, the intercept of the consumption line can be determined as
a=CbY
¿ $ 3115 ( 0.63 × $ 4820 )
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5BUSINESS ECONOMICS
¿ $ 3115$ 3036.6
¿ $ 78.4
With change in GDP to $4873, the new domestic consumption is
C=78.5+ ( 0.63 × $ 4873 )
¿ $ 78.5+$ 3069.99
¿ $ 3148.39 billion $ 3148 billion
l) New GDP
New export: $690 + $4 = $694 billion
New investment: $785 - $3 = $782 billion
New government consumption: $585 - $3 = $582 billion
New government investment: $210 + $4 = $214 billion
GDP=C+I +G+ XM
¿ 3115+782+582+214+ 694565
¿ $ 4822 billion
ChangeGDP=$ 4822$ 4820
¿ $ 2 billion
As the estimate suggests GDP increases by $2 billion.
Answer to question 2
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6BUSINESS ECONOMICS
a) Demand-pull and cost-push inflation
Inflation indicates the rate at which overall price of goods and service increases causing
decline in purchasing power of money measured by Consumer Price Index. The investigation on
cause of inflation suggests that it caused mainly due to demand or supply side factors or both.
Inflation arising from demand side factor leads to demand pull inflation while inflation arising
from supply side factors leads to cost-push inflation.
Demand-pull inflation results from an increase in aggregate demand of the economy.
Aggregate demand comprises of four main sections- Household, government, business and
foreign buyers (Weale et al., 2015). When aggregate demand of current output exceeds the
output that the economy can produce, then the four sectors compete buy goods and services
available in limited amount. As buyers bid for prices, price increases causing demand-pull
inflation.
Figure 1: Demand-pull inflation
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7BUSINESS ECONOMICS
Aggregate supply refers to the total amount of goods and services that an economy
produces at a given level of price. If aggregate supply falls due to an increase in cost of
production, the economy experiences cost-push inflation (Marthinsen, 2017). For compensating
higher production cost, producers pass on the cost to the consumers resulting in an increase in
general level of price or inflation.
Figure 2: Cost-push inflation
b) Causes of demand-pull and cost-push inflation
There are different causes that can result in demand-pull inflation. The first cause of
demand-pull inflation is the growing state of an economy. If an economy grows continuously,
households become more confident and they are encouraged to spend more rather than to save.
As spending increases, there is an increase in aggregate demand, which pushes up the average
price level (Heijdra, 2017). The second cause of demand-pull inflation is adaption of
discretionary fiscal policy. Increase in government spending or lowering tax rate increases
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8BUSINESS ECONOMICS
aggregate demand for the economy. Because of this kid of fiscal policy, people have more
discretionary income to spend on different goods and services.
Several factors can contribute to cost-push inflation. One main cause of cost-push
inflation is increase in wage of workers. Wage is one of the main costs that a firm faces.
Increasing wage means a higher production cost causing cost-push inflation. The second cause of
cost-push inflation is the imported inflation. Devaluation of currency increases price of imported
goods in the domestic market (Blanchard, 2013). Therefore, an economy realizes an increase in
price level because of increases in import cost.
Answer to question 3
a)Zero unemployment target
Policymakers in an economy always aims to achieve full employment. Targeting full
unemployment however does not refer to zero unemployment rate. Setting unemployment target
to be zero is not supportive for a healthy economy. An economy should target to attain lowest
unemployment rate or natural unemployment rate. The natural unemployment indicates
incidence of unemployment due to factors other than a bad economy (McConnell et al., 2013).
One part of the natural unemployment is frictional unemployment caused due people like new
graduate join the labor market or people quitting their existing jobs to find a better one.
Structural unemployment resulted from inability of workers to find jobs due to skill mismatch
forms another part of natural unemployment. This implies zero unemployment rate is not
desirable for the economy and therefore, policy makers should not target for zero unemployment
rate. Positive unemployment rate equal to economy’s natural unemployment rate is the price for
supporting technological development or help people to chase their dreams.
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9BUSINESS ECONOMICS
b) Unemployment in classical model
One important assumption of classical model is flexibility of wage. The flexibility of
wage implies helps to keep the labor market always in equilibrium. When supply exceeds
demand of labor, there is a decline in equilibrium wage ensuring all the available workers are
employed fully. Because of the self-correction mechanism, classical economists believe that any
form of unemployment that occurs in the long run are voluntary. Voluntarily unemployed labors
means people are unemployed because they are not willing to work at the lower wage (Svensson,
2015). When there are unemployed people, classical theory depicts a decline in wage. If wages
fall, producers then can supply more goods and services at a lower cost. This helps the economy
to reach again the potential output and restores full employment.
c) Structural and cyclical unemployment
Structural and cyclical unemployment differs in the sense of factors causing these types
of unemployment. Structural unemployment occurs due to structural changes that an industry or
economy experiences resulting in a mismatch of skills of workers and that is needed for the
available jobs (Chen et al., 2017). Cyclical unemployment in contrast is the result of trade cycle
fluctuation. An example of cyclical unemployment is the laying off workers during recessionary
phase of business cycle.
Both types of unemployment though is cause of concern for policymakers, structural
unemployment needs more attention. Structural unemployment if persists for a long time, then it
leads to steady long-term unemployment harming productivity of the economy (Grieve, 2017).
This kind of unemployment if ignored by policymakers raises the lowest desirable
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Answer to question 5
a) Improvement in marketing and selling skills of firm managers
When marketing and selling skills of firms’ managers improve, they are better able to
their products to the customers. As they have an improved skill to convince people, people are
now more willing to buy goods and services. With increases in tendency of people to spend more
aggregate demand increases. The increase in aggregate demand curve causes a rightward shift of
the aggregate demand. Expansion of aggregate demand is associated with a higher GDP and
inflation.
Figure 3: Impact of selling and marketing skills improvement
b) Increase in personal income tax
Change in income tax influences disposable income of people and hence, affects
consumption expenditure, which is a part of aggregate demand. If government increases personal
income tax, then people have to pay a greater share of their income as tax. This reduces income
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11BUSINESS ECONOMICS
left to spend on goods and services lowering consumption expenditure. This reduces aggregate
demand lowering both inflation and price level.
Figure 4: Impact of tax increase
c) Increase in export
If export of a nation increases, earnings from export increases which adds to aggregate
demand. An increase in aggregate demand shifts the demand curve outward increasing price
level and output.
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12BUSINESS ECONOMICS
Figure 5: Impact of export increase
d) Destruction of capital stock
If capital stock destroys because of war, production of goods and services in the economy
is hampered due to a lower supply of capital (Frisch & Worgotter, 2016). This lowers the
aggregate supply shifting the aggregate supply curve to the left. Consequently, aggregate output
falls and price level increases.
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Figure 6: Impact of capital stock destruction
Answer to question 6
a)Advantages and disadvantages of using CPI
Advantages
i.CPI is an effective measure to capture inflation in a nation as it includes a wide variety of goods
and services representing overall price level of the economy.
ii. If all the necessary information are given, CPI can be easily computed and interpreted.
iii. Another advantage of CPI include flexibility and consistency. The basket of goods in the
index includes represents a consistent basket of goods and services that consumers in the
economy face. CPI is adjustable to outside factors like change in choice of customers and other
seasonal adjustment.
Disadvantages
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14BUSINESS ECONOMICS
i.CPI does not include any measure to find out the impact of quality change on standard of living
of a nation (Fox & Syed, 2016).
ii. With passes of time, new products are introduced. CPI however does not alter the basket for
entry or exit of new products.
b) Inflation: winners and losers
Inflation refers to a situation of gradual increase in price level. An increase in price level
lowers the purchasing power of money. Increase in price level is not at all bad for all people in
the economy. There are both gainers and losers from inflation. People having large fixed rate
debts likely to gain from inflation as they repay money having a lower real value. Investors in
stocks also gain from inflation as factors causing an increase in price level also increases values
of company’s stock (Gomis-Porqueras & Puzzello, 2015). In contrast, savers, retirees, investors
in long term bonds, homeowners having variable mortgage rate, holder of credit card and anyone
having income independent of price level loses from inflation because of a lower real income.
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15BUSINESS ECONOMICS
References
Blanchard, O. (2013). Blanchard: Macroeconomics. Pearson Higher Ed.
Chen, J., Kannan, P., Loungani, P., & Trehan, B. (2017). Cyclical or structural? Evidence on the
sources of us unemployment. In Globalization (pp. 245-264). Springer, Berlin,
Heidelberg.
Fox, K. J., & Syed, I. A. (2016). Price discounts and the measurement of inflation. Journal of
Econometrics, 191(2), 398-406.
Frisch, H., & Worgotter, A. (Eds.). (2016). Open-Economy Macroeconomics. Springer.
Gomis-Porqueras, P., & Puzzello, L. (2015). Winners and Losers from the euro. Deakin
University, Faculty of Business and Law Economics Series No. 2015_2.
Grieve, R. H. (2017). Involuntary unemployment: a reminder. Real World Economics
Review, 81.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Marthinsen, J. E. (2017). International Macroeconomics for Business and Political Leaders.
Routledge.
McConnell, C. R., Brue, S. L., Flynn, S. M., & Grant, R. R. (2013). Microeconomics: Brief
Edition. McGraw-Hill/Irwin.
Stiglitz, J. E. (2015). Reconstructing macroeconomic theory to manage economic policy.
In Fruitful Economics (pp. 20-56). Palgrave Macmillan, London.
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16BUSINESS ECONOMICS
Svensson, L. E. (2015). The possible unemployment cost of average inflation below a credible
target. American Economic Journal: Macroeconomics, 7(1), 258-96.
Weale, M., Blake, A., Christodoulakis, N., Meade, J. E., & Vines, D. (2015). Macroeconomic
policy: Inflation, wealth and the exchange rate. Routledge.
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