1.

List and discuss the three means of measuring the annual value of total output in a given
economy?
Answer:-

2. For the given economy, based on the information in the table

S.No Expenditure Categories Millions of

. Birr
1 Personal consumption expenditure (C) 4500
2 Gross Private domestic Investment (I) 850
3 Gov. Purchase of goods and Services (G) 1250
4 Export (X) 750
5 Import(M) 1000
6 Net Factor Income Received from Abroad (NFIRA) 950
7 Net Factor Income Paid Abroad (NFIPA) 1050
8 Indirect Business Tax (IBT) 450
9 Depreciation (D) 525

Calculate:
A. Gross Domestic Product (GDP)
B. Gross National Product (GNP)
C. Net National Income (NNP)
D. National Income (NI)
E. Trade Balance (NX)

Solution:-

A)

GDP = C + I + G + NE ,where NE = X – M

= 4,500 + 850 + 1,250 + (750 – 1,000)

= 6,350 millions of birr

B)

GNP = GDP + NFI ,where NFI = NFIRA – NFIPA

= 4,500 + (950 – 1,050)

= 6,250 millions of birr

C)
 NNP = GNP - D

= 6,250 - 525

= 5,725 millions of birr

D)

NI = NNP - IBT

= 5,725 - 450

= 5,275 millions of birr

E)

NX = X - M

= 750 – 1,000

= -250 millions of birr

3. A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the
wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour to
make bread and sells the GDP?

Solution:-

GDP = sum of the value added at each stage of production

Farmer: $1 - $0 = $1  value added

Miller: $3 - $1 = $2  value added

GDP = $1 + $2 = $3

4. Consider an economy that produces and consumes Bread and Automobile. Data for two
different years 2005 and 2010 is given in the following table.

Year 2005 2010

Price of Automobile $ 5000 $6000
Price of a loaf of bread $ 10 $ 20
Number of automobiles produced 100 120
 Number of loaves of bread produced 500,000 400,000

Using the year 2005 as a base year,

a) Calculate the nominal and real GDP of 2010.
b) Find the value of GDP Deflator for the year 2010 and interpret.
c) Calculate the inflation rate in 2010.

Solution:-

2005 is the base year from the given table.

A)

Nominal GDP of 2010 = (120 * $6,000) + (400,000 * $20)

= $8,720,000

Real GDP of 2010 = (120 * $5,000) + (400,000 * $10)

= $4,600,000

B)

Nominal GDP
GDP deflator of 2010 = ×100
Real GDP

8,720,000
= × 100
4,600,000

= 189.56

 This shows that the price in 2010 was 89.56% higher than the price in base
year.

C)

Inflation rate = %change in price of all goods and services

Pf −Pi
Inflation rate = %change= ×100 %
Pi

P 2010−P2005
= ×100 %
P 2005
 189.56−100
= ×100 % = 89.56%
100

5. What is the difference between GDP and GNP? Which one is a better measure of the
economic performance of a country?

In economics, Gross Domestic Product (GDP) is used to calculate the total value of the goods
and services produced within a country’s borders, while Gross National Product (GNP) is used to
calculate the total value of the goods and services produced by the residents of a country, no
matter their location.

Essentially, GDP looks for the amount of economic activity within a nation’s economy, while
GNP looks at the value of the economic activity generated by the nation’s people. This means
that GNP will count the economic activities of expatriates and other citizens outside the
country’s borders but GDP will not, and that GDP will consider the activities of non-citizens
within those borders, but GNP will not.The following table shows some more differences
between GDP and GNP according to different focuses:-
I

GDP GNP

Definition Definition
The value of goods and
The value of goods and services produced by the
services produced within the citizens of a nation
geographical boundaries of a irrespective of the
nation in a financial year is geographical limits in a
termed as GDP. financial year is known as
GNP.
What Does It Measure?
What Does It Measure?
It measures only the domestic
production. It measures only the national
production.
Emphasis
Emphasis

It emphasizes on the
production that is obtained It emphasizes on the
domestically. production that is achieved by
the citizens living in different
nations.
Highlights
Highlights
It highlights the strength of
the country’s Economy It highlights the contribution
of the residents to the
Scale of Operations development of the economy
Scale of Operation
Local scale
International scale
Excludes
Excludes
The goods and services that
are being produced outside The goods and services that
the economy are excluded. are produced by the
foreigners living in the
country are excluded
Accordingly From a point of generalization, GDP is much more better in measurement of
economic performance because it provides a more accurate picture of a nation's total
economic activity regardless of country-of-origin, and thus offers a better indicator of an
economy's overall

6. A firm operates in a perfectly competitive market. The market price of its product is 4
birr and the total cost function is given by
1 3
TC = Q −5 Q 2 +20 Q+50 ,
3

Where TC is the total cost and Q is the level of output.

a) What level of output should the firm produce to maximize its

profit?
b) Determine the level of profit at equilibrium.
c) What minimum price is required by the firm to stay in the
market?

Solution:-

Given

1 3
Price(P) = 4 birr, TC = Q −5 Q 2 +20 Q+50
3

A)

The profit maximizing output is that level of output which satisfies

the following condition:
i) MC = MR
ii) MC is rising
 i) To find MR and MC

dTR d ( PQ) d 4 Q
MR = = = =4
dQ dQ dQ

dTC
MC = = Q 2−10 Q+20
dQ

Q2−10 Q+20=4

Q2−10 Q+16=0

(Q−8)(Q−2)=0

 Q = 2 or Q = 8  These values satisfy the i) condition

ii)

dMC
Slope of MC = = 2Q – 10
dQ

 At Q = 2, slope of MC is -6, implies that MC is decreasing.

 At Q = 8, slope of MC is 6, implies that MC is increasing.

Therefore, the firm maximize its profit by producing 8 units.

B)

To determine the level of profit at equilibrium, we have to find TR and TC

at the equilibrium level of output (Q = 8), in order to find ∏equilibrium.

TR = P * Q = 4 *8 =32

1
TC= Q 3−5 Q 2 +20 Q+50
3

1
TC= ( 8 units )3−5 ( 8 units )2+20 ( 8 units )+50
3

= 170.6 – 320 + 160 + 50

= 60.67 birr

∏ = TR – TC

= 32 – 60.67
 = -28.67 birr

C)

The minimum price needed by the firms to stay in the market have to be at
least equal to the minimum AVC.

dAVC
To find the minimum AVC, derivate AVC and = 0.
dQ

First, find AVC,

TVC 1 3
AVC =
Q
, 3
2
TVC = Q −5 Q +20 Q

1 2
AVC = Q −5 Q+20
3

dAVC
Minimum AVC = =0
dQ

2
= Q−5 = 0
3

15
Q=
2

15
 AVC is minimum when Q = units.
2
2
15 1 15 15
AVC at = ( units) −5( units)+20
2 3 2 2

= 1.25 birr

Therefore, to stay in the market the firm should get a minimum price of 1.25 birr.

7. Discuss the main assumptions of perfectly competitive market?

8. Discuss the similarities and differences between oligopoly and monopolistically

competitive market structure?

9. Given a short run cost function as

 1 3
TC = Q −2 Q 2 +60 Q+100
3

Find the minimum value of AVC and MC?

10. Consider the following short run production function

Q = 6 L2−0.4 L3

a) Find the value of L that maximizes output?

b) Find the value of L that maximizes marginal product?
c) Find the value of L that maximizes average product?