1.

Introduction: Gross Domestic Product (GDP) and Gross National Product (GNP)
Gross Domestic Product (GDP) is the gross value of all goods and services produced within a
country, during a certain period. It also measures the income earned from that production, or the
total amount spent on final goods and services. GDP is used as a point of comparison between
the nation’s current economy and previous period’s economy. By this comparison we decide
whether the nation’s economy grew or contract then the previous period. The rate at which GDP
increases in comparison to previous period defines the economic growth of a country. When an
economy experiences positive GDP growth for consecutive period, it is considered an expansion
and when it experiences negative GDP growth for a period, the economy is generally considered
to be in a recession.
GDP is the sum of consumer spending, investment, government purchases, and net exports. It is
represented by the equation:
Y = C + I + G + (X-M)
Consumer Expenditure, C, is the sum of spending by households on durable goods, nondurable
goods, and services. For example, food, clothing, health care etc. Investment, I, is the sum of
expenditures on capital equipment, inventories, and structures. Examples include machinery,
unsold products etc. Government Expenditure, G, is the sum of expenditures by all government
bodies on goods and services. Examples salaries to government employees. Net exports, (X-M),
describes the difference between exports and imports.
Gross National Product (GNP) is the total measure of the flow of goods and services at market
value resulting from current production during a financial year in a country which also includes
income from abroad. Gross National Product considers the manufacturing of tangible goods such
as vehicles, agricultural products, machinery, etc., as well as the provision of services like
healthcare, business consultancy, and education. The information provided by GNP also helps in
analyzing the balance of payments. The balance of payments is determined by the difference
between a country’s exports to foreign countries and the value of the products and services
imported from other countries. A balance of payments is less means that the country imports
more goods and services export. A balance of payments is high means that the value of the
country’s exports is higher than the imports. Overall, GNP means the total volume of business,
production and services in the country, as well as profits from foreign investment.
GNP = GDP + Net factor income from abroad
i.e. Y = C + I + G + (X-M) + Z
Similar to GDP, C is Consumer Expenditure, I is investment, G is Government Expenditure, (X-
M) is net exports and Z is Income earned on all foreign assets minus Income earned by
foreigners in the country.
GDP VS. GNP
GDP is used to calculate the total value of the goods and services produced within a country
while GNP is used to calculate the total value of the goods and services produced by the
residents of a country, no matter where they live. GDP is used to see the strength of a country’s
local economy while GNP is used to see how the nationals of a country are doing economically.
GDP refers to the total income that has been created within the country including any income
that is credited to foreigners (e.g. profits, interest, outward payments from immigrants) while
GNP refers to the total income of all the population of the country, including any income that
they have earned from abroad (e.g. dividends, interest, inward remittances from relatives who
have emigrated etc.)
GNP will count the economic activities of people who lives outside their native country and
other citizens outside the country, but GDP will not count these activities.
If a county has similar inflows and outflows of income from assets, then GNP and GDP will be
very similar. However, if a country has many multinationals who send income back from local
production, then GNP will be lower than GDP.
GNP greater than GDP is best for a country because it means that the population of that country
will have a greater total income than if GDP was greater than GNP.
Companies like Amazon, Apple etc. produces goods and services for sale on the global
economy. Since GNP considers all output of domestic residents, it includes these companies and
their economic activities which 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.
Choosing a better measure between GDP and GNP is largely a political choice. Domestic
companies operating overseas count in GNP. Foreign companies operating domestically count in
GDP. GDP is an account where the economic activity is taking place. GNP is an account of the
nation behind the economic entity. For example, for choosing a better measure America made a
choice to shift from GNP to GDP for accurately reflecting what they wanted to measure, and it
also appears that it is the common measure globally.
Conclusion: Both GDP and GNP assess the overall economic performance of the nation for a
certain period and serve as a barometer for measuring the level of the country's economic
activity. Economists and investors focus more on GDP than GNP because it provides a more
accurate picture of a country’s total economic activity despite of the country of origin and thus
offers a better indicator of overall health of the economy. GNP is still important, especially when
comparing it alongside GDP from the same year.
2.
Introduction: Consumers and Producers are highly influenced by Demand and Supply.
Equilibrium is a stage at which both the Demand and Supply meet. Equilibrium price is the
market price at which market demand of a product is equal to the market supply of that product.
This means that the quantity demanded of a product by a consumer is equal to the quantity
supplied by the supplier. The Equilibrium price of a product can change due to various reasons,
such as reduction in cost of production, fall in the price of substitute goods, unfavorable climatic
conditions etc.
Equilibrium is expressed as:
Quantity Demanded = Quantity Supplied
Qd(P) =Qs(P)
Given:
Qd = 1200-P and Qs=120+3P
Solution:
Qd(P) = Qs(P)
1200-P = 120-3P
1200-120 = 3P + P
1080 = 4P
P = 1080 / 4
P = 270
Here, the equilibrium price P is Rs. 270.
Analyzing Demand and Supply:
Demand Analysis
Given: Qd = 1200 – P
Qd = 1200 – 270
Qd = 930

If Price is Rs 400, then

Qd = 1200 – P
Qd = 1200 – 400
Qd = 800

If Price is Rs 120, then

Qd = 1200 – P
Qd = 1200 – 120
Qd = 1080

Supply Analysis:
Given: Qs = 120 + 3P
Qs = 120 + 3(270)
Qs = 120 – 810
Qs = 930

If Price is Rs 400, then

Qs = 120 + 3P
Qs = 120 + 3(400)
Qs = 120 + 1200
Qs = 1320

If Price is Rs 120, then

Qs = 120 + 3P
Qs = 120 + 3(120)
Qs = 120 + 360
Qs = 480

The price of a product is determined at a point where the forces of supply and demand meet. The
point where the forces of demand and supply meet is called equilibrium point. Equilibrium is a
stage where the balance between the two functions demand and supply is achieved.
From the above solution of demand and supply at various prices, we can observe that at the price
of Rs. 270, the demand and supply of computers is equal i.e. both demand and supply is of 930
computers. Supply(1320 Computers) for computers is greater than the demand(800 Computers)
for computers at price of Rs 400 while Demand(1080 Computers) for computers is greater than
the supply(480 Computers) for computers at price of Rs 120. Therefore, market equilibrium
exists at 930 where the demand and supply of the computers is equal.

Graph Showing Market Equilibrium of Demand and Supply.

Conclusion: Equilibrium is the state in which the market forces are balanced, where the current
prices between supply and demand is even. Prices are the indicator of where the economic
equilibrium can be defined. If the market price is above the equilibrium value, there is an excess
supply in the market, which means there is more supply than demand. In this situation, sellers
will tend to reduce the price of their good or service to clear their inventories. They probably will
also slow down their production or stop ordering new inventory. The lower price attracts more
people to buy, which will reduce the supply further. This process will result in demand
increasing and supply decreasing until the market price equals the equilibrium price. If the
market price is below the equilibrium value, then there is excess in demand (supply shortage). In
this case, buyers will bid up the price of the good or service in order to obtain the good or service
in short supply. As the price goes up, some buyers will quit trying because they don't want to, or
can't, pay the higher price. Additionally, sellers, more than happy to see the demand, will start to
supply more of it. Eventually, the upward pressure on price and supply will stabilize at market
equilibrium.
3.a.
Introduction: Elasticity of demand is defined as the responsiveness of the quantity demanded of a
good to changes of the variables on which demand depends. More precisely, elasticity of
demand is the % change in quantity demanded divided by the % change in one of the variables
on which demand depends.
Price elasticity of demand expresses the response of quantity demanded of a good to a change in
its price given the consumer’s income, his tastes and prices of all other goods. In other words, it
is measured as the % change in quantity demanded divided by the % change in price, other
things remaining equal.
Price Elasticity od demand = % change in Quantity demanded
% Change in Price
Thus, the formula for calculating the price elasticity of demand is:
E(p) = dQ / Q
dP / P
Where,
E(p) = Price elasticity of demand
Q = Initial quantity demanded
dQ = Change in quantity demanded
P = Initial Price
dP = Change in price

Solution:
Given:
P = Rs 450
dP = fall in price i.e. Rs 450 – Rs 350
Therefore, dP = Rs 100
Q = 25,000 Units
dQ = 35,000 – 25, 000
Therefore, dQ = 10,000
According to the price elasticity demand formula,
eP = 10000 x 450
100 25000
eP = 45,00,000
25,00,000
eP = 9/5
eP = 1.8
Thus, the absolute value of elasticity of demand is greater than 1.
Conclusion:
The value of price elasticity varies from minus infinity to approach zero from the negative sign,
because dQ/dP has a negative sign. In other words, since price and quantity are inversely related,
price elasticity is negative. But, for the sake of convenience, we ignore the negative sign and
consider only the numerical value of elasticity. Thus, if a 1% change in price leads t0 2% change
in quantity demanded of good A and 4% change in quantity demanded of good B, then we get
elasticity of A and B as 2 and 4 respectively. This shows that demand of B is more elastic or
responsive to price changes than of good A. If we considered minus signs, we would have
concluded that the demand of A is more elastic than that for B which is incorrect. Hence by
convention, we take the absolute value of price elasticity and derive conclusion.
3. b.
Introduction: Cross elasticity of demand
A change in the demand of one good in response to change in the price of another good
represents cross elasticity of demand of the former good for the latter good. Here, we consider
the effect of changes in relative prices within a market on the pattern of demand.
Cross elasticity of demand can be represented as:
E(c) = dQx Py
dPy Qx
Where,
E(c) = Cross elasticity of demand
Qx = Original quantity demanded for X
dQx = Change in quantity demanded for X
Py = Original Price of good Y
dPy = Change in price of Y
If two goods are substitutes for each other, the cross elasticity between them is positive. This
means that an increase in price of one product results in an increase in the demand for substitute
product and vice versa. There exists a high cross elasticity demand between new and old cars
since the demand for old cars is highly elastic. Old cars will sell at relatively low prices
compared to new cars as they have been used for a while and this suggests how their demand is
highly elastic. If a used car of the same make and model wasn’t cheaper than the new car it’s fair
to assume almost every consumer would choose the new car.
Comparison: Distinction between Price Elasticity, Income Elasticity and Cross Elasticity can be
expressed as cross elasticity means a change in the demand for a commodity owing to change in
the price of another commodity while price Elasticity is the responsiveness of demand to change
in price and income elasticity means a change in demand in response to a change in the
consumer’s income and advertising elasticity of demand is the change in the demand as a result
of the change in advertisement and other promotional expenses.
Types of Cross elasticity are positive, negative and zero. Types of price elasticity are Perfectly
elastic demand, Perfectly inelastic demand, Relatively or Higher elastic demand, Relatively
inelastic demand and Unitary elastic demand and types of Cross elasticity are positive(high,
unitary and low), negative and zero.
Conclusion: In case of cross elasticity, if two goods are perfect substitute of each other, cross
elasticity between them is infinite. Greater the elasticity, closer is the substitute. If two goods are
totally unrelated, cross elasticity between them is zero. If two goods are substitutes for each
other, cross elasticity between them is positive. When two goods are complementary to each
other, cross elasticity between them is negative so that a rise in the price of one lead to a fall in
the quantity of other. Higher the negative cross elasticity, higher will be the extent of
complementarity.