AIOU 0402 Economics Solved Assignment 3 Spring 2025
AIOU 0402 Assignment 3
1. What is Gross National Product (GNP)?
Gross National Product (GNP) measures the total economic output produced by a country's residents, regardless of where the production takes place.
Measurement of GNP:
- GNP = GDP + Net income from abroad
Resultant Benefits:
- Helps in assessing national economic performance.
- Assists policymakers in determining economic strategies.
- Indicates standard of living and economic prosperity.
Difference between GNP and NNP:
- GNP considers total national output before deducting depreciation.
- Net National Product (NNP) is GNP minus depreciation of capital assets.
2. What is an accelerator?
The accelerator principle states that an increase in demand leads to greater investment in capital goods, boosting economic growth.
Measurement:
- Investment = Acceleration factor × Change in demand
Effects on investment:
- Increased demand leads to higher capital expenditure.
- Encourages firms to enhance productivity and expand operations.
- Helps in technological advancements through increased investment.
3. (a) Differentiate between supply and stock of money.
Stock of Money: Refers to the total amount of money held in an economy at a particular time.
Supply of Money: Refers to the actual amount of money available for transactions at a given period.
Ingredients of the supply of money:
- M1 (Narrow Money) - Includes currency in circulation and demand deposits.
- M2 (Broad Money) - Includes savings deposits and money market instruments.
- M3 (Total Liquidity) - Includes large time deposits and institutional money holdings.
- Central Bank Reserves - Represents the monetary base controlled by the central authority.
3. (b) Discuss Fischer’s equation of exchange.
Fischer’s equation of exchange is: MV = PT
- M = Money supply
- V = Velocity of money
- P = Price level
- T = Transactions (real output)
4. Discuss the history of the evolution of banks.
History of banks:
- Ancient Banking - First emerged in Mesopotamia, where merchants made loans.
- Medieval Banking - Development of promissory notes and coin-based transactions.
- Modern Banking - Introduced banking regulations and central banks.
Types of Banks:
- Commercial Banks - Offer loans, deposits, and financial services.
- Central Banks - Regulate monetary policy and issue currency.
- Investment Banks - Focus on securities and capital markets.
- Retail Banks - Serve individual customers.
- Microfinance Banks - Provide small-scale lending to businesses.
5. (i) Ricardo's theory of comparative advantage
Ricardo’s theory states that countries should specialize in producing goods in which they have a lower opportunity cost and trade for other goods.
- Countries benefit from trade by efficiently allocating resources.
- Comparative advantage ensures mutual benefits for trading nations.
5. (ii) Modern theory of international trade
The modern theory emphasizes multiple factors beyond comparative advantage, including technological progress, economies of scale, and trade barriers.
- Factor Proportions Theory - Countries export products in which they have an abundance of resources.
- Product Life Cycle Theory - Trade patterns evolve based on product innovation.
- New Trade Theory - Focuses on scale economies and network effects in global trade.
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