Professional Documents
Culture Documents
BUSINESS ECONOMICS
GROUP ASSIGNMENT
GROUP:
74
GROUP MEMBERS:
Ranasinghe R. A. R. A.
Rathanayaka P. K. H.
Rathnayake R. M. M. R.
Rupasinghe R. A. D. K.
Samarathunga S. C. J.
DEPARTMENT:
Electrical Engineering
DATE OF SUBMISSION:
28-08-2013
100439E
100455A
100457G
100465E
100473C
MN 3042
BUSINESS ECONOMICS
CONTENTS
PAGE
Introduction
03
03
Macroeconomic Variables
03
04
05
Output
07
07
08
10
12
Measuring Unemployment
12
Sources of Unemployment
12
14
15
16
16
17
18
Foreign trade
19
19
19
20
21
22
Conclusions
23
References
24
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INTRODUCTION
Macroeconomics is the study of the behavior of the economy as a whole. It examines
the forces that affect many firms, consumers, and workers at the same time. In contrast with
microeconomics which studies individual prices, quantities and markets. Macroeconomics
runs through two major paths. One is the short term fluctuations in output, employment and
prices. The second is the long term trends in output and living standards. The development of
macroeconomics was one of the major breakthroughs in 20th century economics, leading to
much better understanding of how to combat periodic economic crises and how to stimulate
long term economic growth.
Objectives and Instruments of Macroeconomics
The major macroeconomic goals are high level and rapid growth of output, low
unemployment and stable prices. We can identify three objectives of macroeconomic policy.
Output: high level and rapid growth of output. Employment: high level of employment with
low involuntary unemployment. And price level stability. There are two major instruments or
policy measures available to modern economics. Monetary policy: controlling the money
supply to determine interest rates. Fiscal policy: government expenditure and taxation.
No nation is an island unto itself. All nations participate in the world economy and are
linked together through trade and finance. Nations keep a close watch on their foreign trade
flows. As the costs of transportation and communication have declined, international linkages
have become tighter than ever before. As economies become more closely linked,
policymakers devote increasing attention to international economy policy. The study national
and regional economy policies become far important at these points. Then macroeconomics
plays a major role in there.
Macroeconomic Variables
We have selected four key macroeconomic variables to study in this report. The first
one would be the output. The most comprehensive measure of total output in an economy is
the gross domestic product (GDP). It is a measure of the market value of all final goods and
services produced in a country during a year.
The second key variable we wish to study is the employment. Of all the
macroeconomic indicators, employment and unemployment are most directly felt by
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individuals. The unemployment rate is an indicator of labor force that is unemployed. The
unemployment rate tends to reflect the state of the business cycle.
The third key variable is price stability. Maintaining price stability means that the
overall price level is either unchanged or rising very slowly. To track prices, government
conducts rice indexes, or measures the overall price level. An important example is the
consumer price index (CPI) which measures the average price of goods and services bought
by consumers. Economists measure price stability by looking at inflation rate. It is the
percentage change in overall level of prices from one year to the next.
And as the fourth, we have studied the Sri Lankan foreign trade. Net export and trade
balance are two indicators that give information on a countrys foreign trade. Since no
country is any more isolated it is very important to study and understand foreign trade.
Aggregate Supply and Demand
The economic history of nations can be seen in their macroeconomic performance.
Aggregate supply and demand analysis help explain the major trends in output prices.
Aggregate supply refers to the total quantity of goods and services that nations businesses
willingly produce and sell in a given period. Aggregate supply (AS) depends upon the price
level, the productivity capacity of the economy and the level of costs.
National output and the overall price levels are determined by the twin blades of the
scissors of aggregate supply and demand. Aggregate demand refers to the total amount that
different sectors in the economy willingly spend in a given period. Aggregate demand (AD)
is the sum of consumers, businesses, and governments, and it depends on the level of prices,
as well as monetary policy, fiscal policy and other factors.
Aggregate supply and demand determine the major macroeconomic variables. The
chief outcomes as shown if the figure below is: output, employment, the price level and
international trade.
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Figure 01
Aggregate Supply and Demand Determine the Major Macroeconomic Variables
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Practicing engineers today cannot isolate themselves from countrys economy and its
trends. Not only the countrys, itis also favorable to study about regional and world
economies as well to get a proper understanding about the surrounding potential market. For
this we can use macroeconomic concepts. By looking at the changes in the countys
macroeconomic variables we can get a clear picture about the countrys economy.
Therefore we have selected a few Sri Lankan macroeconomic variables and studied its
behavior. It shows how Sri Lankan economy has changed in the past years and how it will
behave in the future. As practicing engineers this is a study of utmost importance. In the next
few pages we have analyzed the above mentioned macroeconomic variables and studied its
behavior. And we have come to study the importance of each variables behavior in industry
for practicing engineer for production and various other reasons.
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OUTPUT
Gross Domestic Production (GDP) and Related Factors
Gross Domestic Production is the sum of all monetary values of all the finished goods and
services produced within the country in a specific time period. Usually it is calculated on
annual basis. GDP is used as an indicator for the economic strength of the country. And it
also indicates the countrys standard of living.
When GDP is calculated without considering the effects of inflation or deflation it is called
Nominal GDP. When economist needs to compare GDP values of several years Nominal
GDP cant be used. When GDP is calculated with considering the change of value of money
it is called Real GDP. Real GDP is calculated with respect to a base year. A factor called
GPD deflator is used to convert the Nominal GDP to Real GDP.
For an example Sri Lanka GDP values for year 2010 and 2011 are respectively 2,645,542 and
2,863,715 million rupees.
(
GDP growth rate is a very important indicator of the economy since by knowing it
economists can predict about the other economic indicators. For an example lets consider the
unemployment. If the GDP growth rate is high that means production of the country has been
increased. It implies number of workers required for the production processes have been
increased. As a result of that unemployment should has been decreased.
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When analyzing the countrys economic strength and standard of living population growth is
highly combined with the GDP. For an example if the GDP has doubled and the population
has tripled within a giving period, average person is producing less than the previous value.
So GDP per capita is calculated to account the population growth into GDP.
For an example in 2011 Sri Lanka GDP is 59.17 billion USD and the population is 20.87
million. There for,
(
This is considered as an indicator for the standard of living of a country. But it has many
drawbacks. Unequal income distribution is a one drawback.
Sri Lankan Gross Domestic Product (GDP)
When we analyze the Sri Lankan GDP we can divide origins of GDP into three major parts.
They are agriculture, industry and services. Values of Real GDP are shown in the following
graph in million rupees.
2009
2010
925,335
1,704,605
2011
338,625
838,932
Services
320,178
760,334
315,610
1,452,988
701,129
295,097
1,406,813
672,791
285,897
2008
Industry
1,569,598
Agriculture
1,783,318
2012
Figure 02
Gross Domestic Product by Origin
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According to above figures we can see that service sector contribution to the GDP is very
high. In year 2012 its contribution is 52.52%. Service sector includes wholesale and retail
sale, hotel and restaurants, transport and communication, banking and insurance, government
services and private services. After the end of the civil war, countrys economy expanded
especially in service sector. Transport and communication services could be spread in to the
areas where the war had been. For example cellular phone subscribers have been increased
from 83% from 2009 to 2012. After the war number of tourist arrivals increased. Arrival of
tourist is increased from 125% from 2009 to 2012 Because of that hotel and restaurant
services could be expanded.
Industrial sector contribution is 30.34%. It includes mining and quarrying, manufacturing,
Electricity gas and water and construction. Although Sri Lanka is considered as an
agricultural country, agriculture contributes the GDP only by 11.11%. Paddy, tea and coconut
are the most important crops in agriculture GDP. Less enrolment of young generation to
agriculture, unavailability of proper pricing system on vegetables, less improvements in
research facilities and changes in weather conditions for last years may be the reasons for this
less contribution.
As Sri Lanka administration has been divided in to nine provinces we can also analyze the
provincial contribution to the national GDP. Vales in million rupees are shown on the
following figure.
2009
2010
2011
Figure 03
Provincial GDP Contribution
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We can see that western province contribution to the national GDP is high. It is 44.4%.
Reason for this is majority of manufacturing industries and trade has been concentrated to the
Western province.
Following table shows the GDP growth of each province in year 2011.
Western
GDP
Growth %
(2011)
15.6
Central
Southern
Northern
Eastern
North
Western
North
Central
14.5
21.4
27.1
12.4
21.9
12.4
Table 01-GDP growth of each province in year 2011
Uva
15.5
S'gamuwa
15.7
Northern Province has recorded the highest GDP growth in 2011 as a 27.1%. Expansion in
agriculture, fishing, transportation and financial services after the war is the reason for that.
High growth rate of the Southern province is due to high growth of the construction sector.
North Central province mainly contributes to the GDP by agriculture. Due to the adverse
weather conditions at past years production of agricultural products decreases. There for the
GDP growth rate of North Central province is a low value. Because of long dry season in
year 2010 and 2011 rainfall to the Central Province reduced. Because of that hydro power
generation at Central province decreased. That may have affected in the low GDP growth rate
of Central province.
The Importance to Practicing Engineers
We can see that many factors have affected on the GDP value of Sri Lanka in past years. For
practicing engineers it is very important identify trends GDP changes and causes for those
changes for many reasons.
Engineers are mainly involved in industry and service sectors. Lets consider about the
contribution to the GDP by construction, manufacturing, electricity and telecommunication.
First three belongs in the industry and telecommunication belongs to the services. Following
graphs illustrates the contribution to the Real GDP from these sectors. Value is indicated in
million rupees.
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Contribution to GDP
600000
500000
400000
300000
200000
100000
0
2008
Manfaucring
2009
2010
Contruction
Electricity
2011
2012
Telecommuniation
We can observe that all for categories contribution to GDP is increasing. Manufacturing
industry is the highest contributor. Because of that more money circulates at manufacturing
industries. That means industrial production has been increased. There for job opportunities
related to manufacturing processes for engineers have been increased. Also we can see a
large expansion in construction sector. One of the main reasons is government policy on
infrastructure development. Mainly for road and highway development government invests
more money. There for practicing engineers there are more opportunities in construction
sector. Due to increase in electricity generation and increase in cellular connection and
broadband connection electricity and telecommunication sector is also expanding.
For a practicing engineer GDP analyzing is very important. They can identify threats and
opportunities to their career by identifying trends.
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Sources of Unemployment
Consider all the ways in which people can become unemployed. They may resign or be
sacked from their jobs. They may be looking for their first job after having left school or
graduated. Or they may be trying to re- enter the labour force after an absence.
Pick up any week end newspaper and thumb through the classified pages, the employment
section may run for more than ten pages and include thousands of jobs, from accountant to
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zoologists.To understand paradox we must take a closer look at the reasons behind
unemployment statistics. Based on the sources of unemployment, we distinguished four basic
types. There are frictional, structural, seasonal and cyclical unemployment.
Fictional Unemployment
Similar as employees do not often hire the first applicant who comes through the
door, workers do not always accept their first job after. Both employers and job applicants
need time to explore the job market. During the time taken to accumulate and act on all this
information job vacancies remain unfilled. The time required to bring together labour
suppliers and labor demanders results in frictional unemployment. Frictional unemployment
does not last long and results in better between workers and jobs, so ensuring a more efficient
economy.
Structural Unemployment
Structural unemployment occurs because changing demand and changing technology
reduce the demand for certain skills and increase the demand for other skills. Whereas most
frictional unemployment is short term and voluntary, structural, unemployment is usually in
voluntary and can last long time.
Seasonal Unemployment
Unemployment caused by seasonal shifts in labour supply and demand during the
year is called seasonal unemployment. It occurs in industries such as Agriculture, Tourism
and Fisheries. Agriculture and Fisheries industries experience peak demand for labour during
the season when harvesting occur. Those employed in seasonal occupations know they will
probably be unemployed during particular months.
Cyclical Unemployment
Cyclical Unemployment exists when the overall demand for labour is low. It occurs
because of the general decline in output during a recession, most firms reduce their demand
for inputs, including labour .The distinction between cyclical and other kinds of joblessness
helps economists to diagnose the general health of the labour market.
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Youth unemployment remained high although it declined for some age categories in
2012. The unemployment rate for the age group 20-29 years declined to 11.3 per cent in 2012
from12.3 per cent in 2011. Continued focus on technical, vocational and ITbased training will
further improve the employability of the young population. The unemployment ratefor the
30-39 year and over 40 year categories was lower at 2.5 per cent and 0.8 per cent,
respectively,than the national average in 2012.
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According to the Public Sector Employment Survey carried out by the Central Bank,
the number of employees in both government and semi-government increased. The
increase in the number of employees in the government sector was primarily due to an
increase in casual and contract employees in the secondary and primary level. New
recruitments to the Sri Lanka Navy, Department of Civil Security and the Sri Lanka Air
Force mainly contributed to this increase. Employment in semi-government increased
marginally in almost all levels.
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The last
definition attributes the cause of inflation to monetary growth relative to the output /
availability of goods and services in the economy. In case the price of say only one
commodity rise sharply but prices of other commodities falls, it will not be termed as
inflation. Similarly, in case due to rumors if the price of a commodity rises during the day
itself, it will not be termed as inflation.
Different types of inflation
(a) Demand - Pull Inflation - In this type of inflation prices increase results from an excess
of demand over supply for the economy as a whole. Demand inflation occurs when supply
cannot expand any more to meet demand.
(b) Cost - Push Inflation - This type of inflation occurs when general price levels rise owing
to rising input costs. In general, there are three factors that could contribute to Cost-Push
inflation, rising wages, increases in corporate taxes, and imported inflation.
(c)Wage Push Inflation - Rising wages tend to cause inflation. In effect this is a combination
of demand pull and cost push inflation. Rising wages increase cost for firms and so these are
passed onto consumers in the form of higher prices.
(d) Imported Inflation - Depreciation in the exchange rate will make imports more expensive.
Therefore, the prices will increase solely due to this exchange rate effect. A depreciation will
also make exports more competitive so will increase demand.
Inflation rate can be calculated using,
i yeart
The Consumer Price Index (CPI) is a measure of the overall cost of the goods and services
bought by a typical consumer. It is used to monitor changes in the cost of living over time.
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FOREIGN TRADE
International Trade Balance
When the foreign trade is considered, we can see there are three types of trades. They are,
Import Trade: Import trade refers to purchase of goods by one country from another country
or inflow of goods and services from foreign country to home country.
Export Trade: Export trade refers to the sale of goods by one country to another country or
outflow of goods from home country to foreign country.
Entrepot Trade: Entrepot trade is also known as Re-export. It refers to purchase of goods
from one country and then selling them to another country after some processing operations
Need and Importance of Foreign Trade
Helps to sharing of labour and specialization:Foreign trade leads to division of labour and
specialisation at the world level. Some countries have abundant natural resources. They
should export raw materials and import finished goods from countries which are advanced in
skilled manpower. This gives benefits to all the countries and thereby leading to division of
labour and specialisation.
Optimum allocation and utilization of resources: Due to specialization, unproductive lines
can be eliminated and wastage of resources avoided. In other words, resources are
channelized for the production of only those goods which would give highest returns. Thus
there is rational allocation and utilization of resources at the international level due to foreign
trade.
Equality of prices: Prices can be stabilised by foreign trade. It helps to keep the demand and
supply position stable, which in turn stabilises the prices, making allowances for transport
and other marketing expenses.
Making available more choices: Foreign trade helps in providing a better choice to the
consumers. It helps in making available new varieties to consumers all over the world.
Improves quality and standard goods: Foreign trade is highly competitive. To maintain and
increase the demand for goods, the exporting countries have to keep up the quality of goods.
Thus quality and standardised goods are produced.
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Raises standard of living of the people: Imports can improve standard of living of the people
of any country. This is because people can have a choice of new and better types of goods
and services. By consuming new and better varieties of goods, people can improve their
standard of living.
Generating employment opportunities: Foreign trade helps in generating employment
opportunities, by increasing the mobility of labour and resources. It generates direct
employment in import sector and indirect employment in other sector of the economy such as
Industry, Service Sector (insurance, banking, transport, and communication).
Helps to economic development: Imports help to economic development of a nation. This is
because with the import of capital goods and technology, a country can generate growth in all
sectors of the economy, such as agriculture, industry and service sector.
Net export
Net export is defined as value of a country's total exports minus the value of its total imports.
In other words, net exports is the amount by which foreign spending on a home country's
goods and services exceeds the home country's spending on foreign goods and services.
It is used to calculate a country's aggregate expenditures, or GDP, in an open economy.
Trade balance
The trade balance is the difference in value over a period of time of a country's imports and
exports of merchandise; a nation's balance of trade is favorable when its exports exceed its
imports.
Factors That Can Affect the Balance Of Trade
The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting
economy vise-versa those in the importing economy.
The cost and availability of raw materials, intermediate goods and other inputs.
The availability of adequate foreign exchange with which to pay for imports.
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Textile fabrics
Mineral products
Diamonds
Petroleum
Emeralds
Foodstuffs
Rubies
Machinery
Coconut products
Rubber manufactures
Fish
and
transportation
equipment
Year
Total Exports
Total Imports
Balance of Trade
Total Trade
2003
3519.90
4656.00
-1136.10
8175.90
2004
5612.40
7925.90
-2313.50
13538.30
2005
6164.15
8313.54
-2149.39
14477.69
2006
6829.46
9867.68
-3038.23
16697.14
2007
7675.16
11400.99
-3725.82
19076.15
2008
8179.45
14191.05
-6011.60
22370.50
2009
7118.14
9766.51
-2648.36
16884.65
2010
8293.73
12340.34
-4046.61
20634.07
2011
10017.63
19703.02
-9685.39
29720.64
2012
9180.54
17888.65
-8708.11
27069.19
Table 02 - Total Exports/ Total Imports/ Bal. of Trade/ Total Trade for past 10 Years
(US $ M)
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In early period of the decade following 1950, nearly 90 per cent of exports from Sri
Lanka consisted of tea, rubber and coconut while rice accounted for 25 per cent of imports.
The import of rice and other food imports were necessary to maintain the food subsidy
scheme promoted by the country. Imports of those items continued to grow faster rate than
exports as a result of population growth.
The situation was further worsened by the continuing decline of terms of trade. The
net result was imports into Sri Lanka were always higher than exports. The period since 1977
can be classified as a more liberal period when all restrictions on trade and transactions were
abolished.
During this period, imports have continued to grow at a faster rate than exports, and
trade balance has always been in deficit. However, with the composition of exports shifting to
more industrial exports, this has reduced the dependence on the traditional exports of tea,
rubber and coconut.
Importance of Trade Balance to Practicing Engineers
Trade balance is important to practicing engineers. it gives the picture about assets
which are purchased by foreigners from us and assets which are purchased from them.
International trade balance is the difference between exports & imports,
NX = X M.
If exports > imports, a trade surplus, NX > 0.
If exports < imports, a trade deficit, NX < 0.
So, if the trade balance is negative we will have to improve exports. So we should produce
our products to meet international requirements and standards. We have to widen existing
exporting products and always try to improve their quality. Further we have to identify more
products and services which can be exported by us.
If the trade balance is negative we have a good trade balance. So we have to maintain the
quality of products and services and also we should try to improve them further. We should
also identify the future trends and also hat are the treats can be affected to our products. So
we can see the international trade balance is very important to practicing engineers.
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CONCLUSIONS
We made a thorough analysis of key macroeconomic variables and its behavior in Sri
Lankan economy. Its changes are of vital importance to practicing engineers in an economic
point of view. These are the conclusions we came to at the end of our study.
When measuring the countrys economic strength GDP acts a major role. There are
many sub-indices which are related to the GDP. When analyzing Sri Lanka GDP we can
identify that service sector has the highest contribution to the national GDP. For the growth
of Sri Lanka GDP factors like end of war have been affected. Provincial contribution to the
national GDP has a vast variety. Environmental and social factors are the reasons for that. In
past few years there is an increase in the contribution to the national GDP by manufacturing,
construction, electricity and telecommunication sectors. Practicing engineers can identify
those trends and develop their professional skills and qualifications according to them.
Unemployment is a major macroeconomic issue exists in most of economies. so in the
case of unemployment, potential output is going to waste , and it is therefore clear why the
reduction of unemployment is desirable. But when economists talk about full employment
they do not mean zero unemployment. In an ever-changing economy where entrepreneurs are
continually introducing new products shifts in demand and technology alter the supply of
demand introduce new products for existing products. If unemployment rates are high as
engineers we can come to a conclusion that the production is low and employment chances
are less. This could be an indicator for practicing engineers to start new production and
finding employees to the said new production line would be easy.
When the current trade balance of Sri Lanka is being considered, we can see it is a
negative. So, there is a trade deficit. So we should improve our exports and try to reduce
unnecessary imports.
So government should get some decisions,
i.
ii.
Export subsidies
Investment tax allowances to encourage increased research and development etc.
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REFERENCES
Central Bank of Sri Lanka. (2012) Annual report 2012. Retrieved from
http://www.parliament.lk/papers_presented/07052013/annual_report_central_bank_of_srilank
a_2012.pdf
Central Bank of Sri Lanka Communications Department (2012, August). Press Release:
Provincial Gross Domestic Product 2011. Retrieved from Central Bank of Sri Lanka Press
Releases and Speeches online: http://www.cbsl.gov.lk/htm/english/02_prs/p_1.asp?yr=2012
Central Bank of Sri Lanka Communications Department (2013, July). Press release: Inflation
declines further in July 2013. Retrieved from Central Bank of Sri Lanka Press Releases and
Speeches online: http://www.cbsl.gov.lk/htm/english/02_prs/p_1.asp?yr=2013
Nordhaus, W.D., &Samuelson, P. A., (2006) Economics(18th ed.). Delhi, India: Tata
McGraw-Hill
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