Hawassa University

Information technology 2nd year

Section 1
Course title: economics

group name Id no

1. BETHLEHEM TAMRAT 2910/13

2. BINIAM ZERIHUN 0583/13

3.DURESA GEMECHU 0861/13

4. DAWIT ABEBAW 0762/13

1/28/2023
1 .Discuss the different approaches to measure national income and their
limitations?

There are several approaches to measure national income, each with their own strengths and
limitations?

 The Gross Domestic Product (GDP) approach measures the value of all goods and
services produced within a country's borders during a given period of time. This approach
is widely used and considered to be a good overall measure of a country's economic
activity, but it does not account for the underground economy or the value of unpaid
work (such as housework and childcare) and does not take into account negative
externalities, such as pollution.

 The Gross National Product (GNP) approach measures the value of all goods and
services produced by a country's residents, regardless of where they are located. This
approach takes into account the value of income earned by citizens living abroad, but it
does not account for the value of non-resident production in the country.

 The Net National Product (NNP) approach is similar to the GNP approach, but it
subtracts the value of depreciation (or capital consumption) from the value of national
production. This approach provides a measure of the increase in the country's stock of
productive assets, but it does not account for the distribution of income among citizens.

 The Human Development Index (HDI) is a composite measure of a country's standard

of living based on three dimensions: health, education and standard of living. This
approach provides a broader measure of well-being and quality of life than GDP or GNP,
but it does not fully capture a country's economic performance or potential.

 The Genuine Progress Indicator (GPI) is a measure of economic well-being that takes
into account the cost of environmental degradation, income distribution, and other factors
not considered in GDP. This approach attempts to provide a more comprehensive
measure of well-being than GDP, but it is not widely used and can be difficult to
calculate.

Overall, each approach has its own strengths and limitations. GDP is widely used and considered
to be a good overall measure of a country's economic activity, but it does not account for the
underground economy or the value of unpaid work. HDI and GPI provide a broader measure of
well-being and quality of life but they don't fully capture a country's economic performance or
potential.
2. What is the difference between GDP and GNP? Which one is a better
measure of the economic performance of a country?

Gross Domestic Product (GDP) is a measure of a country's economic output in a specific

period of time, usually one year. GDP measures the value of all goods and services produced
within the domestic boundaries of a country, regardless of their ownership.

Gross National Product (GNP) is a measure of the total income or output of a country's citizens
and businesses, both inside and outside the country, within a given period of time. GNP includes
the factor income generated by the citizens or companies of a country, even if they are located
overseas.
The main difference between GDP and GNP is the way they measure production. GDP only
takes into account production within a country's borders, while GNP includes production of
domestic companies located overseas.

Both GDP and GNP are useful measures of a country's economic performance, however, GDP is
usually considered to be the better measure. GDP is a more comprehensive measure of economic
activity, as it takes into consideration all economic activities within a country's borders, not just
income earned by citizens or domestic businesses located abroad. In addition, GDP can be used
to generate other economic indicators, such as per capita income, which provides a better view of
a country's economic health than GNP.

3. What is unemployment? How can we measure it?

Unemployment is defined as a state of sustained lack of access to paid work across the
economy. It is typically measured by the Bureau of Labor Statistics as individuals who are
actively looking for employment, but are unable to find suitable work. The broadest measure of
unemployment is known as the unemployment rate, which takes into account the entire work-
eligible population of a given area, and measures the percentage of those individuals who are not
employed. This rate can be used to measure the economic health of a region or country.

Unemployment has a number of different causes. These can range from structural factors, such
as technological changes that reduce demand for certain types of jobs, to cyclical factors, such as
economic downturns and recessions. In addition, demographic shifts, such as population growth
or aging, can also contribute to increases in unemployment.

Unemployment is typically measured using two primary indicators: the unemployment rate and
the number of unemployed individuals. The unemployment rate is calculated by dividing the
total number of unemployed individuals by the total number of civilians in the labor force. This
gives an overall picture of unemployment in a particular region or country.

The number of unemployed individuals is calculated by subtracting the total number of

employed individuals from the total number of those looking for work. This gives a more
detailed picture of the employment situation and can be further broken down into different labor
segments, such as specific age groups, gender, or educational attainment levels.
Unemployment can have negative economic and social effects. It can lead to higher poverty
levels, as individuals are unable to support themselves or their families. It can also increase
crime and lead to a decline in overall economic output due to a lack of consumer spending.
Furthermore, high levels of unemployment can lead to a decline in overall productivity, resulting
in a weaker economy overall. As such, it is important for governments to institute policies that
can regulate unemployment and encourage the creation of new jobs.

4. What is inflation? What are its causes? What is its impact on the economy?

Inflation is the persistent increase in the prices of goods and services over a certain period of
time. Inflation is measured by the Consumer Price Index (CPI), which is a basket of goods that
reflect what people commonly buy. As prices rise, the purchasing power of a unit of currency
decreases.

The main cause of inflation is an imbalance between the supply and demand for goods and
services in an economy. If the demand for goods and services exceeds the supply, it will lead to a
rise in prices and inflation. Other causes of inflation include increases in the money supply,
increases in the cost of production for businesses, and rising wages for workers.

Inflation affects all sectors of the economy, from consumers to businesses to governments.
Consumers pay more for goods and services, and their purchasing power is reduced as a result.
Businesses face increased costs of production, and this can decrease their profits. Governments
will also experience increased costs, as they must pay more for things such as collective goods,
government wages, and investments.

Inflation has both positive and negative effects on an economy. Inflation can lead to economic
growth, as businesses are able to expand and hire more workers, increasing aggregate demand
and stimulating the economy. On the other hand, if inflation runs too high, it can cause economic
stagnation, as businesses and consumers decide not to spend due to rising prices.

Inflation can also be beneficial for savers, as interest rates are increased with rising inflation.
This means that savers receive a larger return on their savings, as the purchasing power of their
money increases over time.

In order to reduce inflation, a government can use monetary and fiscal policies to reduce
aggregate demand. For example, the government might increase taxes, reduce the money supply,
or increase interest rates, all of which will make it more expensive for consumers and businesses
to borrow money and spend it.

Inflation can be a double-edged sword. If it rises too quickly or too high, it can lead to economic
stagnation, while if it is too low, it can indicate an economy that is not growing. To ensure a
healthy economy, governments must attempt to keep inflation low and stable.
Causes of inflation
While there are a variety of causes of inflation, the most prominent among them are demand side
inflation, cost-push inflation, supply-side inflation, external shock inflation and structural
inflation.
Demand side inflation is caused by an increase in aggregate demand for goods and services. This
increase in demand can be caused by a variety of factors, including higher levels of expended
funds from businesses and consumers, increased borrowing, and the injection of new money into
the economy by the government (also known as Quantitative Easing). When the demand for
goods and services exceeds available supply, prices go up.

Cost-push inflation occurs when the cost of producing goods and services rises due to increased
costs of inputs or labor. For example, if there is an increase in the minimum wage, businesses
must inevitably raise prices in order to keep up their profit margins. Higher oil prices will also
cause cost push inflation as business must absorb these increased costs. Supply-side inflation is
similar to cost push inflation in that it is the result of dwindling supplies of goods and services. If
a limited supply of a certain commodity is available, prices will go up due to the lack of supply.
Supply-side inflation can result from a number of factors including natural disasters, embargoes,
and production declines.

External shock inflation is caused by outside factors, such as geopolitical events, wars, or rapid
economic growth. For example, when the OPEC countries announced their production cuts, the
price of oil surged, triggering an increase in inflation. Structural inflation is an increase in prices
due to changes in the structure of the economy, such as increased regulation and bureaucracy,
increased government spending, or an increase in monetary supply.

Inflation causes a variety of economic and social problems, such as increased unemployment,
increased inequality, and reduced investment, as businesses shy away from investing due to the
uncertainty of rising prices. Inflation is a complex economic phenomenon, and its causes and
effects are not always easy to identify, but these five main sources are among the most common
and potent factors that can cause prices to rise.

5. Discuss the three major differences between CPI and GDP deflator.

CPI: The Consumer Price Index (CPI) is a measure of the average change in prices over time in a
basket of consumer goods and services. It is used to measure inflation and calculate real-interest
rates.

GDP Deflator: The GDP deflator is a measure of the overall level of prices within an economy
and is based on changes in prices of all newly produced goods and services in an economy
during a given period. It is used to convert nominal GDP into real GDP, and to compare the
relative prices of different goods and services from one period to another.
The three main differences are-
1. Coverage: The CPI measures the change in the price of a basket of goods and services
consumed by households, while the GDP deflator measures the change in the price of all goods
and services produced within a country.

2. Base year: The CPI uses a base year (usually the latest year available) to calculate the index,
while the GDP deflator uses the prices of the current year as a base.
3. Purpose: The CPI is used to measure inflation and changes in the cost of living for
households, while the GDP deflator is used to measure the overall level of prices in the economy
and to adjust for inflation in the calculation of real GDP.

In summary, CPI is a measure of the change in the price of a basket of goods and services
consumed by households and is used to measure inflation and changes in the cost of living, while
GDP deflator is a measure of the change in the price of all goods and services produced within a
country and is used to measure the overall level of prices in the economy and to adjust for
inflation in the calculation of real GDP.

6.What does a business cycle mean and its phases? What are the
macroeconomic policy instruments?

A business cycle refers to the natural and recurrent fluctuations in economic activity that occur
over time. These fluctuations can be measured by changes in gross domestic product (GDP),
employment, and other indicators of economic activity.
There are typically four phases of a business cycle: expansion, peak, contraction, and trough.

1. Expansion: This phase is characterized by increasing economic activity, rising employment,

and rising incomes. Businesses are expanding, consumer spending is increasing, and economic
growth is generally positive.

2. Peak: This phase marks the end of the expansion and the beginning of a contraction.
Economic activity has reached its highest level and is starting to decline. Employment and
income growth start to slow, and the economy begins to cool down.

3. Contraction: This phase is characterized by a decline in economic activity, rising

unemployment, and falling incomes. Businesses are cutting back, consumer spending is
decreasing, and the economy is in recession.

4. Trough: This phase marks the end of the contraction and the beginning of a new expansion.
Economic activity has reached its lowest level and is starting to recover. Employment and
income growth start to improve, and the economy begins to recover.

Macroeconomic policy instruments are tools used by governments and central banks to influence
the overall level of economic activity. These include monetary policy and fiscal policy.

Monetary policy is the use of interest rates and the money supply to stabilize the economy.
Central banks use monetary policy to control inflation and stabilize economic growth. They do
this by raising or lowering interest rates, which in turn affects the cost of borrowing and the level
of investment. They also use open market operations, which is the buying and selling of
government securities in the open market, to control the money supply.

Fiscal policy is the use of government spending and taxation to influence economic activity.
Governments use fiscal policy to influence the level of aggregate demand, which is the total
demand for goods and services in the economy. They do this by increasing or decreasing
government spending or by changing tax rates.

Both monetary and fiscal policies are tools that governments use to stabilize the economy, but
they have to be used carefully, as they can also have negative impacts on the economy if not used
correctly.