ANSWER ALL QUESTIONS
1. What are the three approaches to measuring GDP? (3 marks)
2. Would an economist consider clean air a scarce resource? Explain.
(4 marks)
3. Richard runs a pizza delivery restaurant. List the three basic types of decisions
economics studies and give an example from Richard's restaurant.
(3 marks)
4. Explain three ways we can use macroeconomic analysis.
(9 marks)
5. Suppose that you lend P1,000 to a friend who pays you back P1,100 the next year.
Suppose that prices that year rose by eight percent and the real rate of return in the stock
market was four percent. Your friend says that he or she was being more than fair by
giving you more than the rate of inflation as a return. What do you think?
(4 marks)
6. Describe four changes in the variables that will cause demand for a product to increase,
shifting the demand curve to the right. (4 marks)
7. What does the cross elasticity of demand measure? How is it calculated?
(3 marks)
1. The three approaches to measuring GDP are the income approach, the expenditure approach, and the production approach.
- The income approach calculates GDP by summing up the incomes earned by all individuals and businesses within a country.
- The expenditure approach calculates GDP by summing up the total spending on goods and services within a country.
- The production approach calculates GDP by summing up the value added at each stage of production within a country.
2. Yes, an economist would consider clean air a scarce resource. Clean air is limited in supply and can be depleted or polluted, making it scarce. Additionally, the demand for clean air exceeds the available supply, further contributing to its scarcity.
3. The three basic types of decisions economics studies are:
- What to produce: Richard's restaurant must decide what types of pizzas and other menu items to produce based on customer preferences and market demand. For example, they may decide to introduce a new specialty pizza based on customer feedback.
- How to produce: Richard's restaurant needs to determine the most efficient methods and technologies to produce their pizzas. They could explore using different ovens or ingredients to improve production processes and reduce costs.
- For whom to produce: Richard's restaurant must identify their target customer base and tailor their marketing and pricing strategies accordingly. For example, they might offer discounted lunch specials to attract office workers or create family meal deals for larger groups.
4. Macroeconomic analysis can be used in the following ways:
- Policy formulation: Governments and central banks use macroeconomic analysis to develop policies that aim to stabilize the economy, control inflation, promote economic growth, and manage unemployment rates.
- Forecasting and planning: Businesses and individuals use macroeconomic analysis to make informed decisions about investments, hiring, production, and spending based on predictions about future economic conditions.
- Evaluating economic performance: Macroeconomic analysis helps assess the overall health and performance of an economy, such as measuring GDP growth, inflation rates, unemployment rates, and trade balances.
- Understanding global economic trends: Macroeconomic analysis allows for the examination of global economic indicators, helping identify trends and patterns that can impact domestic economies and international trade.
5. Inflation erodes the purchasing power of money over time. Given that prices rose by eight percent and the real rate of return in the stock market was four percent, the friend's repayment of P1,100 does not fully compensate for the effects of inflation. The real rate of return should have been higher than eight percent to ensure a positive increase in purchasing power. Thus, the friend's repayment does not exceed the rate of inflation as a return.
6. Four changes in variables that can increase demand for a product, shifting the demand curve to the right, include:
- Increase in consumer income: If consumer income increases, they will have more purchasing power and are more likely to buy the product.
- Changes in taste and preferences: If consumer preferences shift towards the product or it becomes more popular, demand will increase.
- Decrease in the price of substitute goods: If the prices of substitute goods decrease, consumers may switch to the product, increasing demand.
- Increase in population: With an increase in population, there are more potential consumers, leading to an increase in demand.
7. The cross elasticity of demand measures how sensitive the quantity demanded of one good is to a change in the price of another good. It is calculated by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of another good. The formula for cross elasticity of demand is:
Cross Elasticity of Demand = (Percentage Change in Quantity Demanded of Good A) / (Percentage Change in Price of Good B)