Fundamental of Macroeconomics

ECON 102
Dr.Muhammad Jumaa

Assignment
Prepared by

Q.NO.1:

Define the following

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the dollar value of all final goods and
services produced within an economy in a given period of time.
Gross Domestic Product is the best measure of how well the economy is
performing. Calculates GDP via administrative data, which are byproducts of
government functions such as tax collection, education programs, defense,
and regulation, and statistical data, which come from government surveys of,
for example, retail establishments manufacturing firms and farm activity
Real GDP and Nominal GDP
Nominal GDP is the market value (money-value) of all final goods and
services produced in a geographical region, usually a country.
Real GDP is a macroeconomic measure of the value of output economy,
adjusted for price changes. The adjustment transforms the nominal GDP into
an index for quantity of total output.
Nominal GDP measures the current dollar value of the output of the
economy.
Real GDP measures output valued at constant prices.
Nominal GDP: The value of final goods and services measured at current
prices is called nominal GDP. It is denoted by Y
Nominal GDP or Y = P y, where P is the price level and y is real output
Real GDP: The value of final goods and services measured at constant prices
is called Real GDP. It is denoted by y
Real GDP or y =Y/P where P is price level
Per Capita Income (PCI)
Per capita income, also known as income per person, is the mean income of
the people in an economic unit such as a country or city. It is calculated by
taking a measure of all sources of income in the aggregate (such as GDP or
Gross national income) and dividing it by the total population.
Per capita income is often used as a measure of the wealth of the population
of a nation, particularly in comparison to other nations. It is usually
expressed in terms of a commonly used international currency such as the
Euro or United States dollar, and is useful because it is widely known, easily

calculated from readily-available GDP and population estimates, and

produces a straightforward statistic for comparison.
Q.NO.2: A country has Labor Force (LF) of 155 million and out of
total LF; 137 million are employed in different sectors of economy.
Calculate the following?
Number of Unemployed
LF= Number of employed + number of unemployed
155 = 137 + number of unemployed
Number of Unemployed = 155- 137 = 18 million

Unemployment Rate (%)

Unemployment

Rate

Unemployment Rate = (18/155) 100 = 11.6%

Labor Force Participation Rate (%) if the population equal to 234

Million.

LFP

Labour Force
100
Adult Population

LFP = (155/234) 100 = 66.2%

Q.NO.3:
Different types of unemployment

Frictional unemployment is the unemployment that arises from normal

labor turnoverfrom people entering and leaving the labor force and
from the ongoing creation and destruction of jobs.
Structural unemployment is the unemployment that arises when
changes in technology or international competition change the skills
needed to perform jobs or change the locations of jobs.
Seasonal unemployment is the unemployment that arises because of
seasonal weather patterns.
Cyclical unemployment is the fluctuating unemployment over the
business cycle that increases during a recession and decreases during
an expansion

In an economy, 3% of the employed workers lose their jobs and 20%

of unemployed workers during the FY 2012. Calculate the natural
rate of unemployment in that economy
3% of employed workers lose their jobs (s = 0.03)

17% of unemployed workers find jobs (f = 0.17)

The natural rate of unemployment

u
s
0. 03
=
=
=0.15=15
l s+f 0.03+0.17

Q.NO.4:
Inflation
Inflation is an increase in the price of a basket of goods and services that is
representative of the economy as a whole.
Inflation is an upward movement in the average level of prices. Its opposite
is deflation, a downward movement in the average level of prices. The
boundary between inflation and deflation is price stability.
Costs associated with inflation

Shoe leather costs: the resources wasted when inflation encourages

people to reduce their money holdings .Includes the time and
transactions costs of more frequent bank withdrawals
Menu costs: the costs of changing prices printing new menus, mailing
new catalogs, etc.
Misallocation of resources from relative-price variability: Firms dont
raise prices frequently and dont all raise prices at the same time, so
relative prices can vary which distorts the allocation of resources.
Confusion & inconvenience: Inflation changes the yardstick we use to
measure transactions. Complicates long-range planning and the
comparison of dollar amounts over time.
Tax distortions: Inflation makes nominal income grow faster than real
income. Taxes are based on nominal income, and some are not
adjusted for inflation. So, inflation causes people to pay more taxes
even when their real incomes dont increase.