Economics

1. MANAGERIAL ECONOMICS UNIT 3
1.What is national economy?
National economy is the fundamental economic concept that serves a critical measure of a country’s well
being and overall prosperity , Total value of goods and services produced, earned income and expenditures
within a specific time frame .
Inflation and Deflationary Gaps
For timely anti-inflationary and deflationary policies, we need aggregate data of national income. If
expenditure increases from the total output, it shows inflammatory gaps and vice versa.
Standard of Living
Sets of methods for measuring National Income
There are four methods of measuring national income. The type of method to be used depends on
the availability of data in a country and the purpose which is attempted for.
Income Method
In this method, we add net income payments received by all citizens of a country in a particular year.
Net incomes that result in all the factors of production like net rents, wages, interest, and profits are
all added together, but income received in the form of transfer payments are omitted.
Product Method
According to this method, the aggregate value of final goods and services produced in a country
during a financial year is computed at market prices. To find out GNP, the data of all the productive
activities-agricultural products, Minerals, Industrial products, the contributions to production made by
transport, insurance, communication, lawyers, doctors, teachers. Etc are accumulated and assessed.
Expenditure Method
The total expenditure by the society in a financial year is summed up together and includes personal
consumption expenditure, net domestic investment, government expenditure on goods and services,
and net foreign investment. This concept is backed by the assumption that national income is equal
to national expenditure.
Value Added Method
The distinction between the value of material outputs and material inputs at every stage of production
is Value added.
MONETARY AND FISCAL POLICY
Monetary policy and fiscal policy are two different tools that have an impact on the economic activity of a
country.
Monetary policies are formed and managed by the central banks of a country and such a policy is concerned
with the management of money supply and interest rates in an economy.
Fiscal policy is related to the way a government is managing the aspects of spending and taxation. It is the
government’s way of stabilising the economy and helping in the growth of the economy.

2. Governments can modify the fiscal policy by bringing in measures and changes in tax rates to control the
fiscal deficit of the economy.
Below are certain points of difference between the monetary and fiscal policy
Monetary Policy Fiscal Policy
Definition
It is a financial tool that is used by the central
banks in regulating the flow of money and the
interest rates in an economy
It is a financial tool that is used by the central
government in managing tax revenues and
policies related to expenditure for the benefit of
the economy
Managed By
Central Bank of an economy Ministry of Finance of an economy
Measures
It measures the interest rates applicable for
lending money in the economy
It measures the capital expenditure and taxes of
an economy
Focus Area
Stability of an economy Growth of an economy
Impact on Exchange rates
Exchange rates improve when there is higher
interest rates
It has no impact on the exchange rates
Targets
Monetary policy targets inflation in an economy Fiscal policy does not have any specific target
Impact
Monetary policy has an impact on the borrowing
in an economy
Fiscal policy has an impact on the budget deficit

3. ring a financial year is computed at market prices. To find out GNP, the data of all the productive
activities-agricultural products, Minerals, Industrial products, the contributions to production made by
transport, insurance, communication, lawyers, doctors, teachers. Etc are accumulated and assessed.
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1.Define national income.
It is the heart beat of a country ‘s economy .
National economy is the fundamental economic concept that serves a critical
measure of a country’s well being and overall prosperity , Total value of goods
and services produced, earned income and expenditures within a specific time
frame . 89[
National income is the sum total of the value of all the goods and services
manufactured by the residents of the country, in a year., within its domestic
boundaries or outside. It is the net amount of income of the citizens by
production in a year.
National income is a very important concept because it gives us an idea of
how well the economy is doing. It also helps us to compare the standard of
living between different countries.
It indicates the overall health of our economy for that particular year.
2.What is the Keynesian model?
Keynes believed that there are two major factors that determine the
national income of a country. These two factors are Aggregate Supply (AS)
and Aggregate Demand (AD) of goods and services. In addition, he
believed that the equilibrium level of national income can be estimated
when AD=AS.

4. In the Keynesian economic model, too little aggregate demand brings
unemployment and too much brings inflation. increase
3.What do you mean by GNP?
Gross national product (GNP) is the total market value of the final goods
and services produced by citizens of a country during a specific period of
time both domestically or abroad.
GNP takes into account investments made by the businesses and residents of the
country, living both inside and outside the country.
4.Define production function?
PRODUCTION FUNCTION: Production function refers to the functional
relationship between (physical) inputs and (physical) output.
It is a relationship between the input ( resources ) and output ( quantity of good
or services )
Produced by a firm or
Q= F(L , k)
Q- Quantity of output
L – Labour input
K – Capital input
Ex.. production function could be used to predict the number of tons of
steel that the smelter can produce for a given level of investment and
supply of labour.
5.What is Variable cost function?
Variable costs are expenses that vary according to the volume of
goods or services that a business produces.
When production or sales increase, variable costs increase; when
production or sales decrease, variable costs decrease.

5. 6( a)
1.Explain the nature and importance of National income?
It is the heart beat of a country ‘s economy .
National economy is the fundamental economic concept that serves a critical
measure of a country’s well being and overall prosperity , Total value of goods
and services produced, earned income and expenditures within a specific time
frame .
National income is the sum total of the value of all the goods and services
manufactured by the residents of the country, in a year., within its domestic
boundaries or outside. It is the net amount of income of the citizens by
production in a year.
National income is a very important concept because it gives us an idea of
how well the economy is doing. It also helps us to compare the standard of
living between different countries.
It indicates the overall health of our economy for that particular year.
Importance of National Income
 TO KNOW THE ECONOMIC GROWTH
economic growth refers to an increase in aggregate production in an
economy, which is generally give rise in national income.
 TO KNOW ECONOMIC PERFORMANCE
National Income indicates the status of the economy and can give a
clear picture of the country's economic growth. National Income
statistics can help economists in formulating economic policies for
economic development.
 TO KNOW ABOUT UNEMPLOYEMENT
The national income can be determined by summing up all the incomes
earned by individuals, firms, governments from various economic
activities. The term output can be interchangeably used as income
 TO KNOW STANDARD OF LIVING

6. National income data assists the government in comparing the
standard of living amongst countries and people living in the same
country at different times.
 For Budget Preparation
The budget of the country is highly dependent on the net national
income and its concepts. The Government formulates the yearly
budget with the help of national income statistics in order to avoid any
cynical policies.
For Setting Economic Policy
National Income indicates the status of the economy and can give a clear
picture of the country’s economic growth. National Income statistics can help
economists in formulating economic policies for economic development.
For Defence and Development
National income estimates help us to bifurcate the national product between
defence and development purposes of the country. From such figures, we
can easily know, how much can be set aside for the defence budget.
(ii) what are The important concepts of national income ?
1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP) at Market Prices
4. Net National Product (NNP) at National Income
5. Personal Income
6. Disposable Income
Let us explain these concepts of National Income in detail.

7. 1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the
total market value of all final goods and services currently produced within
the domestic territory of a country in a year.
2. Gross National Product (GNP): Gross national product (GNP) is the
total market value of the final goods and services produced by citizens of a
country during a specific period of time both domestically or abroad.
GNP = GDP + Net fact income from abroad.
3. Net National Product (NNP) at Market Price: Net national product
(NNP) is a term that is often used to represent the difference between
gross national product and depreciation. In numerical terms, the NNP is
the total market value of the goods and services produced by a nation
during a specified period (generally a year) with depreciation subtracted
from it.Therefore’
NNP = GNP – Depreciation
4.Net National Product (NNP) at Factor Cost (National Income): This
is the value of final goods and services produced within the economy,
including net income from abroad, measured at factor cost. To calculate
NNP at factor cost, we deduct indirect taxes and add subsidies to the NNP
at market price.:
5. Personal Income: personal income refers to the total earnings of an
individual from various sources such as wages, investment ventures, and
other sources of income like bonuses received from employment or self-
employment, dividends received from investments, and profit from
businesses etc…..
Disposable Income: From personal income if we deduct personal taxes
like income taxes, personal property taxes etc. what remains is called
disposable income. Thus,
Disposable Income = Personal income – personal taxes.
7.(b)distinguish between production functions in the short run and
long run

8. Difference between Short Period Production Function Long Period
Production Function
Short Period Production Function Long Period Production Function
(i)factor ratio varies factor ratio is constant
(ii)it is of variable proportion type Constant proportions type.
(iii)Scale of output DOES NOT CHANGE Scale
of output changes..
Entry to firm is shut but exit is not SHUT entry and exit to firm arenot
shut
scale of production DOES NOT CHANGE scale of production
CHANGE
Factors that affect short period production function
In addition, changes in prices ,changes in the capital stock, the stock of
natural resources, and the level of technology can also cause the short-run
aggregate supply curve to shift.
Factors that affect long period production function
In the long run, if firms under perfectly competitive markets start earning
higher profits, more entrepreneurs will be attracted to such business
ventures. As a result, production will increase. Consequently, the supply
curve will shift outwards the right.

9. 8.(a)Evaluate the role of fiscal and monetary policies in stabilising the
economy during cyclical fluctuations.provide example how this can
be used?
Monetary policy and fiscal policy are two different tools that have an impact on
the economic activity of a country.
Monetary policies are formed formulate and managed by the central banks of a
country and such a policy is concerned with the management of money supply and
fix interest rates in an economy.
Fiscal policy is related to the way a government is managing the aspects of
spending and taxation. It is the government’s way of stabilising the economy and
helping in the growth of the economy.
Governments can modify the fiscal policy by bringing in measures and changes in
tax rates to control the fiscal deficit of the economy.
 Both monetary and fiscal policies are used to regulate economic
activity over time.
 They can be used to accelerate growth when an economy starts to
slow or to moderate growth and activity when an economy starts to
overheat.
 In addition, fiscal policy can be used to redistribute income and
wealth.
 It acts as a medium of exchange, provides individuals with a way of
storing wealth,
 to the creation of an economic environment where growth is stable
and positive and inflation is stable and low.
 to steer the underlying economy so that it does not experience
economic booms that may be followed by extended periods of low or
negative growth and high levels of unemployment.
 In such a stable economic environment, householders can feel secure
in their consumption and saving decisions, while corporations can
concentrate on their investment decisions, and on making profits .

10. EXAMPLE As economic growth weakens, or when it is in recession, a
government can enact an expansionary fiscal policy—for example, by
raising expenditure without an offsetting increase in taxation.
Conversely, by reducing expenditure and maintaining tax revenues, a
contractionary policy might reduce economic activity. Fiscal policy can
therefore play an important role in stabilizing an economy.
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