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ECO401-Final Term-Notes

Introduction to Economics (Virtual University of Pakistan)

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SHORT NOTES ECO 401-LECTURE 23 TO 35 PREPARED BY MR.SAIF UR REHMAN (MC110201030).MBA

SEMESTER 4).
GMAIL.SAIFGILL [email protected] MOBILE :03007252038

MRPL =MPPL x MRi

VMPL=MPPL x Pi
AC(average cost) =Total or fixed cost/Quantity
Marginal External cost =Marginal social cost – Marginal private cost
Value added = value of goods produced – cost of materials and supplies used in producing.
GDP is the total market value of all final goods and services produced within the political boundaries.
Factor Price is a price at which firm sell its final output to consumer.
Market price = Factor price +indirect taxes
Gross National Product: can be obtained by all final goods and services produced during a year by factors owned by the citizen of a country.
GNP= GDP + net factor income from abroad
Net National Product: National income is NNP. It is GNP adjusted for depreciation.
Like NDP , NNP is a measure of net production in the economy.
Net Domestic Product = GDP –Depreciation
NNP = GNP – Depreciation
National Income:- It is often referred to as NNP. Total income earned by the citizens of National Economy. Its government official measure of how much
income is generated by economy.
PRICE DEFLATOR :- Process of converting nominal GDP into Real GDP is known deflation. GDP price deflator is used to an indicator of economy’s
average price level.
GDP Deflator =Nominal GDP/Real GDP
REAL GDP year a = Nominal GDPyear a x (price index base year / Price indexyear a)
Nominal GDP = Total Quantity of goods & services Produced x Prevailing Price Level
GROWTH RATE IN NOMINAL GDP :- nominal Gdp in year 2-nominal Gdp in year 1/nominal GDP year1
Marginal Propensity to Consume(MPC ) : extra amount that people consume when they receive an extra $ of Yd.
MPC =  C /  Yd
Marginal Propensity to Save (MPS) : fraction of additional dollar of Yd that is saved.
MPS =  S /  Yd or MPS = 1- MPC
Saving function = S=c+d(Yd) d is MPS
Average Propensity to Consume(APC) = C /Yd

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Average Propensity to Save(APS) = S /Yd or APS =1 – APC

Investment Demand Curve:- shows relationship between level of investment and cost of borrowing for firm(interest rates). Because funds for
investments hired from banks so relationship between borrowing and investment demand is negative. Jaise jaise interest rate badh jaye ga
Investment ki demand decrease ho jaye gi.
Trade Balance ; if exports are more and imports are less then a country have trade balance or trade balance surplus. If the imports are higher and
exports are less then country has trade deficit.
Fiscal policy :- fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.
Fiscal Balance = T-G if G>T it is fiscal or budget deficit if T>G then there is fiscal/budget surplus. If G=T then it is Budget balance
(Always Remember)Macroeconomic Equilibrium obtains when AS= AD=Y
AD or expenditure function = C+I+G+(X-M)
Multiplier affect = k =1/1-b
Labour force :- The labor force is the actual number of people available for work. The labor force of a country includes both the employed and the unemployed. The labor
force participation rate, LFPR (or economic activity rate, EAR), is the ratio between the labor force and the overall size of their cohort (national population of the same age
range.

Unemployment problem and views.

Classicals:- Reason of unemployment) :-Unemployment is due to wages that are higher than free market levels.
Solution:- if wages are allowed to fall to the market clearing level , firms demand for labor will be increased.
Keynesian:- Reason of unemployment:-Reason is deficient aggregate demand.
Solution:- if we will boost the demand(by government expenditure) , labor demand will be high and so unemployment will be reduced.
Monetarists: Solution:- If we reduce the distance of AJ curve and LF curve then issue can be resolved. If we will move AJ curve to the right
side towards the LF curve. The unemployment rate could be reduced.
Hysteresis : refers to permanent effect of temporary change.
Unemployment rate = (number of unemployed / labor force) x 100
Collusion :Situation in which two or more firms set their prices and output according to a plan agreed upon between them in order to divide the
market among themselves.
Inflation: 3% is positive inflation rate. 7% is quite acceptable. Above 10% is undesirable. Inflation rates in 100s and 1000s of percentage are
hyper inflation. First country of hyper inflation was Germany in 1920s.
The CPI and PPI:
CPI measures the cost of a fixed basket of consumer goods in which the weight assigned to each commodity is the share of expenditures on
that commodity by consumers.
(PPI) is the price index of goods and raw materials sold at the wholesale level to producers: examples of goods in the wholesale basket are steel,
wheat, cotton etc.
• High inflation increases uncertainty for firms, thus impacting investment rather negatively

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• Balance of payments problems are also often a result of high domestic inflation
• Resource wastage is high when inflation is high. Extra resources (time and money) are dedicated, both by individuals and
firms
3 Views are about inflation.
Keynesian View
He sees unemployment and inflation as opposite sides of same coin. It is due to excessive aggregate demand (demand pull inflation)
Philip Curve:-
Philip curve is inverse relationship between the rate of unemployment and rate of inflation in the economy. Phillips found a consist ent inver se
inverse r elat ionship: when unem ploym ent was high, w ages incr eased slowly; when unem ploym ent w as low, wages rose rapidly.

Stagflation:- 1970 two oil prices shocks(supply side shock) , there was rising prices and high unemployment. ( I think it is opposite to Philip
curve)
Cost-push inflation occurs w hen t her e is a shor t age of supply of labor , r aw m at er ials or capit al. The dem and r em ains t he sam e, but since t her e ar e few er goods or
ser vices, t he supplier can char ge m or e per unit . How ever , t his can only occur if dem and for t he end pr oduct or ser vice isinelast ic. That m eans t her e is a high dem and
for t he pr oduct even if t he pr ice goes up.
Som e t im es cost push inflat ion is due t o higher dem and. Suppose dem and for pr oper t y incr eases. This causes housing pr ices r is e, r ent r ises, w or ker s dem and higher for
w ages. High wages causes fir m ’s pr oduct ion cost s t o high.At ever y point cost s is r aising( r ent , product ion, cost of w or ker s.) This sit uat ion is br anded cost push illusion.

Quantiity theory of Money(Monetarists)

Monetarists located the causes of inflation in the Quantity theory of money. QTM states : MV=PQ
Money illusion: is when agents base their decisions on their expectations about inflation(set in prices t-1)
Adaptive Expectations: people learn from previous period. Only an inflation rate higher than this new expected rate can conceive them to
spend more.
BOP(Balance of Payment):-
BOP is an accounting record of a country’s transactions with the rest of the world. The BOP is determined by the country's exports and
imports of goods, services, and financial capital, as well as financial transfers. . It reflects all payments and liabilities to foreigners (debits) and
all payments and obligations received from foreigners (credits).
Foreign exchange, in the Pakistani context, simply means US dollars (note that foreign exchange from the US’s point of view would
be Pak rupees).

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The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another
Floating rate. Under this exchange rate system, each bank quotes its own rate depending on its short and long positions. Strong competition,
however, means the exchange rates vary little among the banks

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