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Managerial Economics For Organisations
Managerial Economics For Organisations
Managerial Economics For Organisations
BY
I.D.O. CHILOKWU
Introduction
used is called the nominal gross domestic product (the GDP). This
is the market value of the total quantity of final goods and services
produced over the specified time period. The GDP is actually
measured in annual terms. In order to understand this measure, it
is necessary first to understand the concept of a final product. The
GDP does not measure the market value of everything that is
produced, because this would entail double counting. Each final
product includes intermediate goods whose value is included in the
value of the final product. Take for example, a simple loaf of bread,
the loaf is made from flour (and other ingredients), the flour is made
from seeds. The value of the bread (the final product) includes the
value of the flour, which includes the value of the seeds. The GDP
includes the market value of the bread – it does not then add the
values of the flour, wheat and seeds. The value of a final product is
also the value of the incomes of everyone involved in the production
of both the final product and the intermediate goods that went into
production.
Let’s say that the baker produces N1000 worth of bread using N700
worth of flour, used N500 worth of wheat, which the farmer grew
from N10 worth of seed. The different between the N1000 and the
N700 is the N300 of income generated by the baker. The difference
between the N700 and the N500 is the N200 of income generated by
the miller. The difference between the N500 and the N10 is the
N490 of income generated by the farmer. If we assume for simplicity
that the seed represents the income generated by the seed
producer. The sum of these incomes (N300 + N200 + N490 + N10) is
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Factors of Production
Factor incomes (wage, rent, interest, profit)
The government agency charged with calculating the GDP each year
measures it in two different ways: it add up the money values of the
final products and it add up all of incomes of the factors of
production. Theoretically, these two operations should give the
same result. They never do because of certain measuring errors.
The primary measurement method, is however, the measurement of
the money values of the final products. Basically, they measure
expenditure on final goods and services, and then made
adjustments for (a) the goods that are produced this period but not
sold, and (b) the goods that are sold this period but were produced
earlier.
Thus, Y = C + I + G + NX
It is important to note that the net domestic product and the net
national product are two measures derived from the GDP and the
GNP respectively by subtracting what is called depreciation or the
consumption of fixed capital. This subtracted amount represents
the wear and tear on the country’s capital equipment of buildings,
machineries and tools.
If the GDP changes, either the actual output of goods and services
has changed, or the prices at which they are selling has changed, or
both. Economists separate the changes in output from the changes
in prices. To do this, they use the concept of real output. The real
output of the economy (i.e. the real GDP) is measured by looking at
current outputs and pricing then at the prices that existed at some
time in the past.
Thus, nominal GDP for this year (2014) is this year’s output priced
at this year’s prices, and real GDP for this year is this year’s output
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priced at 2009 prices. 2009 is known as the base year (if 2009
prices are used as the base year). Because real GDP is not affected
by price changes (only 2009 prices are used), any changes in the
real GDP figure reflects only a change in the actual amounts of
goods and services produced.
From the nominal GDP and the real GDP however, we can derive a
statistics that is used for measuring the rate of inflation. This is
called the GDP Deflator. Prices obviously affect the nominal GDP
but not the real GDP, so dividing nominal GDP by real GDP gives an
indication of the prices. The Deflator is the nominal GDP multiplied
by a hundred and divided by the real GDP. As nominal and real
GDP are the same in the base year, the deflator is always 100 in the
base year. For any other year, the deflator states the price level for
that year as a percentage of the prices in the base year. The
percentage change in the GDP deflator from year to year is
published as the rate of inflation. The real GDP is used as an
indicator of recessions. The rate of growth of the economy is given
as the annual rate of change of real GDP. The economy is officially
considered to be in a recession if the real GDP has declined over at
least two successive quarters. A recession is usually accompanied
by other indicators of weaknesses in the economy; rising
unemployment, falling profits, etc.
Where
Measurement of GNP
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Calculating GNP
What we are concerned here is the value of the final goods and
services or the value-added to these goods and services. Value
added is found by totaling the value of final goods and services or
the value-added achieved by various sectors of the economy. To
avoid double counting, the GDP by the output method must exclude
the value of goods and services at the intermediate stages. The
reason for this exclusion is that the value of goods and services that
go into production at intermediate stages is already included in the
price of the final product.
FISCAL POLICY
Taxes and Government Spending
Fiscal policy describes two governmental actions by the
government. The first is taxation. By levying taxes the government
receives revenue from the populace. Taxation is a transfer of assets
from the people to the government. The second action is
government spending. This may take the form of wages to
government employees, social security benefits, smooth roads,
building of airports, dams, houses, schools, network of roads, ports,
stadia and other infrastructural facilities. When the government
spends, it transfers assets from itself to the public. Since taxation
and government spending represent reversed asset flows, we can
think of them as opposite policies.
Monetary Policy
Money Supply and Monetary Policy
The study of money, banking and interest rates capture the money
supply, as the total amount of currency held by the public. In
banking system, the public reserves excess money in the bank as
deposits, which the banks give out in form of loan to fund users
and investors. Thus, the money supply is better defined as the total
amount of currency plus deposits held by the public.
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There are three (3) basic ways that the CBN can affect the money
supply. The first is through open market operations. The second is
by changing the reserve requirement. The third is through changing
the interest rate. Each of these actions in some way affects the total
amount of currency or deposits available to the public.
The second way that the CBN can influence the money supply is
through changing the reserve requirements. Thus, if the reserve
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The third way that the CBN can influence the money supply is
through changing the interest rate. As we know, banks make
deposits, withdrawals and loans from the CBN (as the banker’s
bank). If the CBN increases the bank rate, the rate at which banks
borrow from the CBN, banks will be less likely to make fewer loans
to the public because the interest rate will be high, and the public
will shun bank loans, resulting in shrinking of the money supply.
Furthermore, on the purpose of banks, the money multiplier shows
how much an initial deposit increases the money supply after loans
are made and redeposited. When a bank makes many loans, its
reserves are near the absolute required minimum. If a customer
makes a withdrawal, banks must either recall a loan or take out a
loan to pay the withdrawal while still maintaining the necessary
reserves. If the CBN increases the bank rate, banks will be less
likely to borrow money from the CBN and will thus be more weary
of making loans to ensure that they have the necessary reserve
requirements.
Inflation
Things cost most today than three years ago. In general, over the
past 54 years (1960-2014) in Nigeria, the overall level of prices has
risen from year to year. This phenomenon of rising prices is called
inflation. Inflation is defined as the continuous rise in the general
price level of goods and services in a specified period of time.
Inflation plays an important role in the macroeconomic economy by
changing the value of a Naira across time. Three important aspects
of inflation which this chapter may not contain are, first how to
calculate inflation, second, the effects of inflation calculations using
the CPI and GDP measures, third, the effects of inflation.
Unemployment
Unemployment is a macroeconomic phenomenon that directly
affects people. When a member of a household is unemployed the
family feels it in lost income and a reduced standard of living.
Because most people rely on their income to maintain their
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This equation basically says that real GDP grows at about 3% per
year when unemployment is normal. For every point above normal
that unemployment moves, GDP growth falls by 2%. Similarly, for
every point below normal that unemployment moves, GDP growth
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6
Inflation rate (% per year)
0
2 4 6 8 10
Unemployment rate(%)
The consumer price index (CPI) is a more direct measure than per
capita GDP of the standard of living in a country. It is based on the
overall cost of a fixed basket of goods and services bought by a
typical consumer, relative to price of the same basket in some base
year. By including a broad range of thousands of goods and services
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with the fixed basket, the CPI can obtain an accurate estimate of
the cost of living. The CPI measures the cost of living based on the
relative cost of a fixed basket of goods and services consumed by a
typical consumer in a country.
(a) Using the figures above, compute the CPI for the country in
year 1 using year 1 as the base year:
(b) Using the figures above, compute the CPI for the country in
year 2 using year 1 as the base year:
(c) What is the percent increase in the price level in the country
from year 1 to year 2?
Percent increase in CPI= CPI2 – CPI1
CPI1 = (N0.50 + N1.00)/(N0.50 + N1.00) x 100
CPI2 = (N1.00 + N2.00)/(N0.50 + N1.00) x 100
Percent increase in CPI = 200 – 100 = 100%
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The recession of 1982 reopened the debate about the real effects of
nominal monetary policy, and the decade of the 1980s reopened the
debate about the simulative effects of government budget deficits.
The classic economic model’s collection include a recent reworking
of the Keynesian model.
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REFERENCES