American College of Technology

(ACT)

Introduction to Economics Group Assignment

PREPARED BY: GROUP 1 MEMBERS

Group Members:
1) Abdulhakim Mohammed
2) Amanuel Addisu
3) Beamlak Tachbele
4) Bereket Melkamu
5) Betel Wondwossen
6) Euel Suraphel
7) Eyerus Gizaw
8) Eyoel Ayaleneh
9) Marsilas Eshetu
10) Natnael Demile
11) Tiesit Anteneh
12) Wayu Getachew
13) Yadeno Gelasa

Submitted To: Mr. Abebe Belay

First of all, we would like to thank Almighty God who guided us through the way
and helped us to prepare this report successfully. Secondly, we would like to thank
our Introduction to Economics (ECON 101) course instructor, Mr. Abebe for giving
us this group assignment from which we learned a lot about some of the core issues
in the subject matter and also for his overall guidance.

i
 Introduction
This group assignment is all about attempting to answer a set of questions related to some of the
core economic issues: the GDP measure of economy, Inflation, Real GDP and economic growth,
and the circular flow diagram by providing thorough analysis. The first section discusses issues
related to GDP not being the perfect measure of a country’s economic performance. The second
section digs deep into discovering the causes, impacts and trends of inflation in Ethiopia. The next
section discusses about the trends of Real GDP and economic growth in Ethiopia. The following
section is where the concept related to the circular flow diagram in Ethiopian economy is
discussed. Here, you will also find a figure where the basic 4 sector circular flow diagram in
Ethiopian economy is shown briefly. In the last section, you will find the brief summary and list
of references.

ii
 Question #1:
Is the Gross Domestic Product (GDP) a perfect measure of economy? Discuss the problems of
measuring economy’s performance using Gross Domestic Product (GDP).
Answer:
Gross Domestic Product (GDP) is a widely used measure of a country's economic performance. It
calculates the market value of all the final goods and services produced within a country's borders
over a specific period, typically annually. However, GDP is not a perfect measure of an economy's
performance as it has various limitations and drawbacks.
One of the major problems with GDP is that it only looks at the monetary value of goods and
services produced within a country's borders. It does not take into consideration the sustainability
of the economic growth; whether the economic growth was obtained through sustainable means.
This means that GDP does not account for environmental factors, such as pollution and natural
resource depletion caused by economic activities. For example, the destruction of a forest may
increase GDP due to the sale of timber, but this does not necessarily reflect sustainable economic
growth since it doesn’t consider the loss of biodiversity, effects on climate change, or many other
non-market goods and services that are important to human well-being.
Additionally, GDP only measures the output of goods and services and does not take into account
the distribution of wealth within a country. This means that a country with a high GDP may not
necessarily have a high standard of living for its citizens. Here, we can take India as a good
example where GDP didn’t take into account the distribution of income or the well-being of the
population.
Another issue is that GDP does not consider the informal sector of an economy. For instance, quite
a number of people in Ethiopia work in the informal sector, such as street vendors (“Gulit” &
“Suk-Bederete”) or people working in the *Gig economy, and their activities are not captured in
GDP calculations.
What’s more, GDP does not account for non-monetary aspects of the economy, such as the value
of unpaid work. This means that activities such as household chores or volunteer work that
contribute to the well-being of society are not reflected in GDP.
Furthermore, GDP does not account for the quality of goods and services produced. A country
may have a high GDP, but if the goods and services produced are of poor quality or do not meet
the needs of its citizens, then the GDP figure may be misleading.
In summary, while GDP is a widely used and useful measure of economic performance, it is not a
perfect measure. It is important for Policymakers to consider alternative measures that take into
account a wider range of factors, such as distribution of wealth, sustainability, and well-being of
the population.

*Gig economy is a free market system in which temporary positions are common & organizations hire independent workers
for short-term commitments. These include painting someone’s house, freelance work, coaching, fitness training & tutoring.

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Question #2:
The Causes, Impacts and Trends of Inflation in Ethiopia [Article / Research Paper Review]
Answer:
Inflation is a persistent increase in the general price level of goods and services in an economy
over a period of time. In Ethiopia, inflation has been a major economic issue for several decades,
with the country facing double-digit inflation rates for consecutive years. Here below, we will be
reviewing the causes, impacts, and trends of inflation in Ethiopia.
Causes of Inflation in Ethiopia: There are several factors that contribute to inflation in Ethiopia.
These include (1) High government spending: The government's monetary and fiscal policies,
including increased government spending, can lead to higher inflation. (2) Currency depreciation:
When the value of the local currency depreciates, it leads to higher import prices, which can cause
inflation in the country. (3) Supply shocks: Natural disasters, such as droughts or floods, can cause
supply shortages and increase prices. For instance, the drought that occurred in Borena has
worsened food insecurity which in turn causes inflation. In addition, poor infrastructure and
agricultural productivity increases the cost of production and subsequently results in higher prices.
(4) High demand: When there is high demand for goods and services, prices tend to rise.
Impacts of Inflation in Ethiopia: Inflation has significant negative impacts on the Ethiopian
economy. These include: (1) Reduced purchasing power: When prices rise, people can buy fewer
goods with the same amount of money, reducing their purchasing power, and consequently
worsening economic conditions for households with fixed incomes.
(2) Increased production costs: When input prices increase, businesses (especially small and
medium-sized enterprises) may have to increase the prices of their goods and services to maintain
their profit margins.
(3) Reduced foreign investment: High inflation can make Ethiopia less attractive to foreign
investors.
(4) Income redistribution: Inflation can lead to a redistribution of income from saver to borrowers.
Trends of Inflation in Ethiopia: In Ethiopia, inflation has been a persistent problem for many
years. According to the World Bank, inflation in Ethiopia averaged 16.8% from 1991 until 2020.
However, inflation has been gradually declining in recent years. In 2020, Ethiopia's inflation rate
was 18.1%, down from 20.4% in 2019.
Research has shown that there are several factors that have contributed to the recent decline in
inflation in Ethiopia. These include improved macroeconomic management including the recent
“Homegrown Economic Reform” agenda, increased agricultural production, and a stable exchange
rate.
To put it in a nutshell, the trend of inflation in Ethiopia has been fluctuating, with instances of
double-digit inflation rates fluctuating with some downward trend with the government's
intervention in monetary policies. However, inflation remains a problem that requires continued
and concerted efforts by the government and policymakers to address.

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 Question #3:
The Trends of Real GDP and Economic Growth in Ethiopia [Article / Research Paper Review]
Answer:
Ethiopia has been experiencing steady economic growth over the past decade. In 2019, the
country's *Real GDP growth rate was 9%, making it one of the fastest-growing economies in the
world. This growth has been driven by several factors, including increased public investment in
infrastructure (particularly in transport and energy sectors), a growing manufacturing sector, and
increased foreign investment.
One of the drivers of Ethiopia's economic growth has been its agricultural sector, which employs
more than 70% of the population and contributes significantly to exports. Ethiopia has also
attracted foreign direct investment in the manufacturing and service sectors, which have
contributed to the country's economic growth.
Research has shown that Ethiopia's economic growth has been accompanied by a significant
reduction in poverty rates. According to the World Bank, the poverty rate in Ethiopia fell from
30% in 2011 to 24% in 2016.
However, despite the impressive and positive trend of economic growth, Ethiopia still faces several
challenges. One of the main challenges is the country’s macroeconomic imbalances, including
inflation, which has been a persistent problem. Additionally, the country's economy remains
heavily reliant on rainfed agriculture, which is vulnerable to weather-related shocks such as
droughts. Furthermore, Ethiopia's private sector, despite showing promising changes, remains
underdeveloped, and the country's infrastructure is in need of further investment. Another
challenge to Ethiopia's economic growth has been political instability, which has resulted in civil
unrest in some regions of the country, resulting in loss of property and lives.
In conclusion, Ethiopia has experienced consistent economic growth and real GDP trends over the
past decade, propelled by investments in infrastructure and agriculture. However, the country faces
several challenges, including macroeconomic challenges such as persistent inflation, a heavy
reliance on agriculture, a need for further investment in infrastructure and the private sector, as
well as political instability that have affected its economic growth. Nevertheless, the country's
government has taken various measures to maintain the economic growth through monetary and
fiscal policy interventions.

*Real GDP: When goods and services included in GDP are valued at constant (fixed) prices i.e., prices of the base year it is called GDP at
constant prices or Real GDP. Constant prices refer to prices prevailing in some carefully chosen year called the base year.

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Question #4:
Show the Circular Flow Diagram in Ethiopian Economy. [How different economic agents interact
in different markets]
Answer:
The circular flow diagram in Ethiopian economy represents the flow of money, goods, and services
among different economic agents in the country. The economy consists of households, businesses,
government and the foreign sector. Households own resources such as labor, capital and land
which are supplied to firms in exchange for income payments in the resource or factor market.
Firms use these resources to produce goods and services which are sold to the households and
other businesses at various prices in the product market. Government collects revenue from taxes
and spends money on public goods and services (transportation infrastructure, education, and
healthcare). Foreigners import and export goods and services to and from Ethiopia creating
international trade balance in the country.

Figure: The Basic Four Sector Circular Flow Diagram in Ethiopian Economy

In the circular flow diagram, different economic players or agents such as households, firms,
government, and foreign sectors (represented as “Other countries” in the above figure) interact in
different markets such as factor markets and product markets. The diagram illustrates how goods
and services are produced and sold by firms to households and other sectors, while households
provide factors of production such as labor and capital to firms in exchange for payment. The
government plays a role in regulating the economy through taxes and subsidies, while the foreign
sector contributes to international trade by importing and exporting goods and services.

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 Summary
✓ While GDP is a widely used and useful measure of economic performance, it is not a perfect
measure. It is important for Policymakers to consider alternative measures that take into account
a wider range of factors, such as distribution of wealth, sustainability, and well-being of the
population, the informal sector and non-monetary aspects of the economy, not forgetting the
quality of goods and services produced.
✓ Inflation has been a significant economic issue in Ethiopia for several decades. High government
spending, currency depreciation, supply shocks, and high demand are among the main causes of
inflation in Ethiopia. The impacts of inflation include reduced purchasing power, increased
production costs, and reduced foreign investment. However, recent years have seen a decline in
inflation in Ethiopia due to improved macroeconomic management, increased agricultural
production, and a stable exchange rate.
✓ Ethiopia has experienced consistent economic growth and real GDP trends over the past decade,
propelled by investments in infrastructure and agriculture. However, the country faces many
challenges, including macroeconomic challenges (such as persistent inflation), a heavy reliance
on agriculture, a need for further investment in infrastructure and the private sector, as well as
political instability that have affected its economic growth. Nevertheless, the country's
government has taken various measures to maintain the economic growth through monetary and
fiscal policy interventions (Homegrown Economic Reform agenda).
✓ The circular flow model in Ethiopian economy helps to illustrate how different economic agents
interact in different markets within the country’s economy.

References
❖ International Monetary Fund. (2018). Ethiopia: Selected Issues. Retrieved from
https://www.imf.org/en/Publications/CR/Issues/2018/06/05/Ethiopia-Selected-Issues-45968
❖ World Bank. (2021). Inflation, consumer prices (annual %) - Ethiopia. Retrieved from
https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=ET
❖ The Balance: https://www.thebalance.com/gdp-limitations-3306015
❖ Mamo, G. (2018). The causes, consequences and policy responses to inflation in Ethiopia.
African Journal of Economic Review, 6(2), 1-14.
❖ Gebrehiwot, T. (2019). The impact of inflation on economic growth in Ethiopia. Journal of
Economics and Sustainable Development, 10(5), 1-12
❖ Teshome, W. (2019). Foreign direct investment and economic growth in Ethiopia: An empirical
analysis. Journal of Economics Library, 6(1), 1-10.
❖ World Bank. (2019). Ethiopia economic update: Financing for development in Ethiopia.
Retrieved from https://www.worldbank.org/en/country/ethiopia/publication/ethiopia-economic-
update-financing-for-development-in-ethiopia
❖ C. K Bansal, Atnafu G/Meskel & Eshete Damte (2011). FDRE Economics Grade 11 Student
Textbook. AA: Aster Nega Publishing Enterprise.

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