Department of information technology
Introduction to economics | assignment
1. Explain the difference between GNP & GDP and the three basic measure approaches
(expenditure, income & product approach) that used to measure national income account.
Gross domestic product (GDP) is the value of a nation's finished domestic goods and services during a
specific time period. A related but different metric, the gross national product (GNP), is the value of all
finished goods and services owned by a country's residents over a period of time.
GDP is a measure of all production activity within the borders of a country,
whereas GNP is a measurement of all production activity by
a country’s citizens and domestic-owned businesses.
The key difference between GDP and GNP is that GNP considers the output of a country’s citizens
regardless of where that economic activity occurred. By contrast, GDP considers the activity within a
national economy regardless of the residency of the producers.
Consider the following situations, which GDP and GNP treat quite differently—the way they treat these
situations forms the core of their difference from one another.
 The net income receipts of foreign companies owned by foreign residents that produce goods in
the country under study. Since GNP only considers citizens of a country and their economic
output, it does not include such companies in its measurement. However, GDP measures
economic output regardless of country of residence—so it does include such companies in its
measurement.
 Companies owned by domestic residents producing goods for global consumption. Think about
companies like Apple, which produce goods for sale on the global economy and often remit their
profits to places with favorable corporate tax laws like Ireland. Since GNP considers any and all
output of domestic residents, it includes these companies and their economic activity occurs
outside the country. However, GDP only measures the economic output of a given nation’s
economy, so it does not consider this international activity, nor the money remitted to foreign
economies.
 Measurement. However, GDP measures economic output regardless of country of residence—so
it does include such companies in its measurement.
 Companies owned by domestic residents producing goods for global consumption. Think about
companies like Apple, which produce goods for sale on the global economy and often remit their
profits to places with favorable corporate tax laws like Ireland. Since GNP considers any and all
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Department of information technology
Introduction to economics | assignment
output of domestic residents, it includes these companies and their economic activity occurs
outside the country. However, GDP only measures the economic output of a given nation’s
economy, so it does not consider this international activity, nor the money remitted to foreign
economies.
GDP vs. GNP GDP measures the value of commodities (goods+services) produced within the country, no matter whether
produced by Residents or non-residents (country concept).
GNP measures the value of commodities produced by all the RESIDENTS, no matter whether produced
within the country or abroad (resident concept).
Example - An Indian national, say Mr. Roy is working in France for less than 1 year:
He contributes to French GDP as he is working in France.
But he also contributes to Indian GNP as he is an Indian Resident, working abroad.
So GNP of India is the money value of all goods and services produced by all the residents of India during
the given year.
What Is the Expenditure Method?
The expenditure method is a system for calculating gross domestic product (GDP) that combines
consumption, investment, government spending, and net exports. It is the most common way to estimate
GDP. It says everything that the private sector, including consumers and private firms, and government
spend within the borders of a particular country, must add up to the total value of all finished goods and
services produced over a certain period of time. This method produces nominal GDP, which must then be
adjusted for inflation to result in the real GDP.
How to Calculate GDP
GDP can be determined via three primary methods. All three methods should yield the same figure when
correctly calculated. These three approaches are often termed the expenditure approach, the output (or
production) approach, and the income approach.
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GDP = C + G + I + NX
Where
 C=consumption;
 G=government spending;
 I=investment; and
 NX=net exports
All of these activities contribute to the GDP of a country. Consumption refers to private consumption
expenditures or consumer spending. Consumers spend money to acquire goods and services, such as
groceries and haircuts. Consumer spending is the biggest component of GDP, accounting for more than
two-thirds of the U.S. GDP.3
The Production (Output) Approach
The production approach is essentially the reverse of the expenditure approach. Instead of measuring the
input costs that contribute to economic activity, the production approach estimates the total value of
economic output and deducts the cost of intermediate goods that are consumed in the process (like those of
materials and services). Whereas the expenditure approach projects forward from costs, the production
approach looks backward from the vantage point of a state of completed economic activity.
The Income Approach
The income approach represents a kind of middle ground between the two other approaches to calculating
GDP. The income approach calculates the income earned by all the factors of production in an economy,
including the wages paid to labor, the rent earned by land, the return on capital in the form of interest, and
corporate profits.
The income approach factors in some adjustments for those items that are not considered payments made
to factors of production. For one, there are some taxes—such as sales taxes and property taxes—that are
classified as indirect business taxes. In addition, depreciation—a reserve that businesses set aside to account
for the replacement of equipment that tends to wear down with use—is also added to the national income.
All of this together constitutes a nation’s income.
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Department of information technology
Introduction to economics | assignment
2. Differentiate between nominal GDP and real GDP and decide which is better to measure
Economic performance;

Difference between nominal GDP and real GDP is the taking of inflation into account. Since
nominal GDP is calculated using current prices, it does not require any adjustments for
inflation.

Nominal GDP represents the current market price value of economic output produced during
the specified time period within a country, while real GDP represents the total economic output
produced during the time period within the country valued at a pre-determined base market
price.
What Is Real GDP?
Real gross domestic product, or real GDP, is a measure of a country’s output in terms of the value of its
goods and services, its investments, its government spending, and its exports. Real GDP takes nominal
GDP and adjusts for inflation or deflation by comparing and converting prices to a base year’s prices. By
adjusting for price changes, the final number won’t reflect false increases or decreases in GDP due to
fluctuation in prices, and it is a more accurate representation of a country’s economic activity.
What Is Nominal GDP?
Nominal GDP, or nominal gross domestic product, is a measure of the value of all final goods and services
produced within a country’s borders at current market prices. Also known as a “current dollar GDP” or
“chained dollar GDP,” nominal GDP takes price changes, money supply, inflation, and changing interest
rates into account when calculating a country’s gross domestic product.
Real GDP provides a more accurate portrait of economic growth than nominal GDP because it uses constant
prices, making comparisons between years more meaningful by allowing for comparisons of the actual
volume of goods and services without considering inflation,
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3. Explain the concept of business cycle?

Business cycles are comprised of concerted cyclical upswings and downswings in the broad
measures of economic activity—output, employment, income, and sales. The alternating
phases of the business cycle are expansions and contractions (also called recessions).
The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle
is a useful tool for analyzing the economy and business performance.
The business cycle is the downward and upward fluctuations of the productivity level of the
economy, along with its natural growth rate over a long period.
The duration of a business cycle is the period containing one expansion and contraction in
sequence? One complete business cycle has four phases: expansion, peak, contraction, and trough.
4. Briefly discuss the types of unemployment and differentiate them.
i.
Cyclical Unemployment
The term “cyclical unemployment” refers to the variation in the number of unemployed workers
during cycles of economic strength and weakness. The nation’s gross domestic product (GDP),
which is the value of goods and services a nation produces during a particular time period, is an
indicator of these economic ups and downs.
Government officials enact economic policies to stimulate the economy and stop this type of
unemployment. When demand for a product or service declines, production also goes down. This
creates less need for employers to hire people who are looking for jobs, causing the unemployment
rate to increase. During the early stages of the COVID-19 pandemic, for example, people were
confined to their homes, leading many businesses to shut down. During this economic downturn,
many employees of those businesses weren’t needed and were left unemployed.
The financial crisis of 2008 provides other examples of cyclical unemployment. One instance of
this type of unemployment occurred when people began to encounter problems paying for their
homes even as others failed to meet the more stringent mortgage qualifications. Demand for home
construction plummeted, leaving workers in that field unemployed.
ii.
Frictional Unemployment
Frictional unemployment is the result of people voluntarily leaving their jobs. People who’ve
resigned from their jobs and graduates seeking their first jobs need time to find employment,
leaving them unemployed in the interim. Looking for a job, seeking a replacement employee, and
finding the right employee for a job take time, but frictional unemployment isn’t necessarily bad.
This type of unemployment usually is short term, and it’s present even in a healthy economy as
people leave their jobs to seek new opportunities.
The economy that emerged from the COVID-19 pandemic saw frictional unemployment, for
example, when employers asked employees to return to work in person after they’d worked
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Department of information technology
Introduction to economics | assignment
remotely for many months. Many employees who preferred to work from home voluntarily left
their jobs in search of roles that better fit their needs.
iii.
Structural Unemployment
Fundamental changes in the economy and labor markets, such as evolving technology, government
policies, and competition, can create structural unemployment. This means that while jobs are
available, the people who could fill those roles either don’t have the right skills for them or aren’t
in the right location. Manufacturing employees may contribute to structural unemployment, for
example, when the requirements of their jobs change, leaving them unemployed because they no
longer possess the right technological skills. Another example can occur when a business moves
jobs to a location that’s too far away for employees to travel to, leaving those employees without
work. Structural unemployment typically lasts longer than frictional unemployment, sometimes
causing an erosion of those unemployed people’s skills or leaving them discouraged from looking
for work.
iv.
Natural Unemployment
Natural unemployment is the combination of frictional and structural unemployment. It refers to
the lowest unemployment level a healthy economy can sustain without causing inflation. This type
of unemployment is ever present: People are always voluntarily looking for new jobs, causing
frictional unemployment, and job skill requirements are always evolving, causing structural
unemployment. It’s common for people to voluntarily leave jobs and for positions to move to other
parts of the world, for example, driving the natural unemployment rate.
v.
Long-Term Unemployment
The BLS classifies people who’ve been unemployed for 27 weeks or more and who’ve actively
sought employment in the past four weeks as long-term unemployed. Cyclical and structural
unemployment drive long-term unemployment. The 2008 recession, for example, caused a large
increase in cyclical unemployment. Some individuals who were unemployed for a long time as a
result of the economic downturn found themselves no longer fit for the skills the jobs required,
driving structural unemployment. The repercussions of long-term unemployment for individuals
can also have a negative effect on the economy. That can contribute to more cyclical
unemployment — and lead to more long-term unemployment.
vi.
Seasonal Unemployment
Seasonal jobs are limited to a certain time period, sometimes leaving people who work in those
jobs without employment after the season ends. Seasonal unemployment is the result of the
decreased demand in labor that occurs at each season’s end, making the seasonal rate more
predictable than other types of unemployment. Seasonal unemployment often occurs in tourist
areas, where attractions often are open only during a certain time of the year. Theme parks, for
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Department of information technology
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example, employ workers only during their operational seasons, which in many climates is limited.
A ski lodge’s employees generally work only when people are skiing. Agricultural workers’ jobs
are timed to when crops are in season.
vii.
Classical Unemployment
Classical unemployment, also known as real-wage unemployment, occurs when real wages, or the
cost of employing a worker, are too high. This circumstance leaves companies unable to afford all
the workers who are available.
When real wages are too high, they’re greater than the benefit the employer gets from the labor an
employee provides. Companies that can’t afford real wages decide not to hire as many people as
are seeking jobs. An example of classical unemployment is when workers negotiate for a minimum
salary that’s more than what a company can afford, making hiring those employees too costly for
that company and leaving those workers unemployed.
viii.
8. Underemployment
Underemployment differs from unemployment in that it describes people who are working, but
aren’t employed at their full capability. Measuring underemployment shows how effectively the
economy is using the labor force’s skills, experience, and work availability. Following are the
categories of underemployment:


Visible underemployment. With visible underemployment, employees work part time despite
their desire to work more hours. Underemployed people, such as office employees who can find
only part-time roles, may work multiple jobs to earn the equivalent of a full-time salary.
Invisible underemployment. When individuals who can’t find a job in their chosen field take a
job that isn’t in line with their experience and skills, they represent invisible underemployment.
Their work often pays less than a role that’s more in line with their background would pay. A
person with an engineering degree working at a coffee shop is an example of invisible
underemployment.
5. What does that mean inflation? Causes of inflation, types of inflation and its impact on
the economy.
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Department of information technology
Introduction to economics | assignment
Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of
the rate at which the decline in purchasing power occurs can be reflected in the increase of an average
price level of a basket of selected goods and services in an economy over some period of time. The
rise in the general level of prices, often expressed as a percentage, means that a unit of currency
effectively buys less than it did in prior periods.
Inflation can be contrasted with deflation, which occurs when the purchasing power of money increases
and prices decline.

What Causes Inflation?
There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in inflation.
Demand-pull inflation refers to situations where there are not enough products or services being produced
to keep up with demand, causing their prices to increase.
Types of Inflation
 Demand Pull Inflation
This is when the aggregate demand in an economy exceeds the aggregate supply. This increase in the
aggregate demand might occur due to an increase in the money supply or income or the level of public
expenditure.
This concept is associated with full employment when altering the supply is not possible. Take a look at
the graph below:
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In the graph above, SS is the aggregate supply curve and DD is the aggregate demand curve. Further,
 Op is the equilibrium price
 Oq is the equilibrium output
Exogenous causes shift the demand curve to the right to D1D1. Therefore, at the current price (Op), the
demand increases by qq2. However, the supply is Oq.
Hence, the excess demand for qq2 puts pressure on the price, increasing it to Op1. Therefore, there is a new
equilibrium at this price, where demand equals supply. As you can see, the excess demand is eliminated as
follows:
 The price rises which leads to a fall in demand and a rise in supply.
Learn more about the Impact of Inflation here in detail.
 Cost-Push Inflation
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Department of information technology
Introduction to economics | assignment
Supply can also cause inflationary pressure. If the aggregate demand remains unchanged but the aggregate
supply falls due to exogenous causes, then the price level increases. Take a look at the graph below:
In the graph above, the equilibrium price is Op and the equilibrium output is Oq. If the aggregate supply
falls, then the supply curve SS shifts left to reach S1S1.
Now, at the price Op, the demand is Oq but the supply is Oq2 which is lesser than Oq. Therefore, the prices
are pushed high till a new equilibrium is reached at Op1.
At this point, there is no excess demand. Hence, you can see that inflation is a self-limiting phenomenon.
 Open Inflation
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Department of information technology
Introduction to economics | assignment
This is the simplest form of inflation where the price level rises continuously and is visible to people. You
can see the annual rate of increase in the price level.
 Repressed Inflation
Let’s say that there is excess demand in an economy. Typically, this leads to an increase in price.
However, the Government can take some repressive measures like price control, rationing, etc. to prevent
the excess demand from increasing the prices.
 Hyper-Inflation
In hyperinflation, the price level increases at a rapid rate. In fact, you can expect prices to increase every
hour. Usually, this leads to the demonetization of an economy.
 Creeping and Moderate Inflation

Creeping – In this case, the price level increases very slowly over an extended period of time.

Moderate – In this case, the rise in the price level is neither too fast nor too slow – it is moderate.
 True Inflation
This takes place after the full employment of all the factor inputs of an economy. When there is full
employment, the national output becomes perfectly inelastic. Therefore, more money simply implies higher
prices and not more output.
 Semi-Inflation
Even before full employment, an economy might face inflationary pressure due to bottlenecks from certain
sectors of the economy.
6. Explain budgetary deficit and its ways of financing:
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Department of information technology
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A budget deficit occurs when government expenditures exceed revenues from taxes and other sources.
Although the concept of a budget deficit applies to any organization with operating revenues and expenses,
the term is most commonly applied to government budgets.
When public savings are negative, the government is said to be running a budget deficit. To spend more
than tax revenues allow, governments borrow money and run budget deficits, which are financed by
borrowing. The amount borrowed is added to the nation's national debt.
Deficit budget can be financed in the following ways: Deficit financing: It means borrowing by the
government from the Central bank against treasury bills. The Central bank purchase treasury bills for
cash and the government uses these funds to finance the deficit
Budgetary deficit is the difference between all receipts and expenses in both revenue and capital account
of the government.
A budget deficit occurs when expenses exceed revenue and indicate the financial health of a country. The
government generally uses the term budget deficit when referring to spending rather than businesses or
individuals. Accrued deficits form national debt.
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