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UNIVERSITY OF MAIDUGURI
Maiduguri, Nigeria
CENTRE FOR DISTANCE LEARNING
MANAGEMENT SCIENCES
ECON 101:
ECONOMIC THEORY AND PRINCIPLE II
UNIT: 3
ECON 101: ECONONIC THEORY AND PRINCIPLE II
units
Published
3
2005©
All rights reserved. No part of this work may be reproduced in any
form, by mimeograph or any other means without prior permission in
writing from the University of Maiduguri.
This text forms part of the learning package for the academic
programme of the Centre for Distance Learning, University of
Maiduguri.
Further enquiries should be directed to the:
Coordinator
Centre for Distance Learning
University of Maiduguri
P. M. B. 1069
Maiduguri, Nigeria.
This text is being published by the authority of the Senate, University
of Maiduguri, Maiduguri – Nigeria.
ISBN:
978-8133-43-6
ii
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ECON 101: ECONONIC THEORY AND PRINCIPLE II
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PREFACE
This study unit has been prepared for learners so that they can do
most of the study on their own. The structure of the study unit is
different from that of conventional textbook. The course writers have
made efforts to make the study material rich enough but learners need
to do some extra reading for further enrichment of the knowledge
required.
The learners are expected to make best use of library facilities and
where feasible, use the Internet. References are provided to guide the
selection of reading materials required.
The University expresses its profound gratitude to our course writers
and editors for making this possible. Their efforts will no doubt help
in improving access to University education.
Professor J. D. Amin
Vice-Chancellor
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HOW TO STUDY THE UNIT
You are welcome to this study Unit. The unit is arranged to
simplify your study. In each topic of the unit, we have introduction,
objectives, in-text, summary and self-assessment exercise.
The study unit should be 6-8 hours to complete. Tutors will be
available at designated contact centers for tutorial. The center expects
you to plan your work well. Should you wish to read further you could
supplement the study with more information from the list of
references and suggested readings available in the study unit.
PRACTICE EXERCISES/TESTS
1. Self-Assessment Exercises (SAES)
This is provided at the end of each topic. The exercise can help
you to assess whether or not you have actually studied and understood
the topic. Solutions to the exercises are provided at the end of the
study unit for you to assess yourself.
2. Tutor-Marked Assignment (TMA)
This is provided at the end of the study Unit. It is a form of
examination type questions for you to answer and send to the center.
You are expected to work on your own in responding to the
assignments. The TMA forms part of your continuous assessment
(C.A.) scores, which will be marked and returned to you. In addition,
you will also write an end of Semester Examination, which will be
added to your TMA scores.
Finally, the center wishes you success as you go through the
different units of your study.
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INTRODUCTION TO THE COURSE
Micro economics is a branch of economics that deals with
individual economic unit such as individual consumption,
saving, demand etc. Macro economics on the other hand
deals with aggregated economic variables/units such as
aggregate demand, inflation, unemployment etc. covering
the entire economy.
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T A B L E O F C O N T E N TS
PAGES
PREFACE
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INTRODUCTION TO THE COURSE
TOPIC 1:
DISTINCITON
BETWEEN
ECONOMICS
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MICRO
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MACRO
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TOPIC 2:
CIRCULAR FLOW OF INCOME
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TOPIC 3:
NATIONAL INCOME
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TOPIC 4:
ECONOMIC GROWTH AND ECONOMIC
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DEVELOPMENT
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TOPIC 5:
FISCAL POLICY -
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TOPIC 6:
MONEY AND BANKING
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TOPIC 7:
INTERNATIONAL TRADE
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SOLUTIONS TO EXERCISES
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T O P I C 1:
TABLE OF CONTENTS
PAGES
1.0
DISTINCTION BETWEEN MICRO AND MACRO
ECONOMICS
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INTRODUCTION -
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1.2
OBJECTIVES
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1.3
IN-TEXT
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1.3.2 LOCATION OF ERRORS
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1.3.3 SUSPENSE ACCOUNT -
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1.3.4 WORKED EXAMPLES -
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SUMMARY -
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1.5
SELF ASSESSMENT EXERCISE
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1.6
REFERENCE
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TOPIC: DISTINCTION BETWEEN MICRO AND MACRO
ECONOMICS
1.1
INTRODUCTION:
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Micro economics is a branch of economics that deals with
individual economic unit such as individual consumption,
saving, demand etc. Macro economics on the other hand
deals with aggregated economic variables/units such as
aggregate demand, inflation, unemployment etc. covering
the entire economy.
1.2
OBJECTIVES:
At the end of this topic you should be able to
i.
Differentiate between the two branches of economic
analysis.
1.3
IN-TEXT
1.3.1 DISTINCTION BETWEEN MICRO AND MACRO ECONOMICS
Every society must allocate its scarce resources among
alternative uses to solve the economic problems of
production, distribution and growth. Since the mid 1930’s,
it has become necessary to divide the subject matter of
economics into two sub-fields i.e. Microeconomics and
Macroeconomics.
1.3.2 MICRO ECONOMICS
Micro is a Greek word micros meaning “small”. However, it
is a special branch of economics which studies individual
economic parts such as households, firms, markets etc. In
short, micro economics studies:
i.
The manner in which consumers allocate their income
among various goods and services and
ii.
The ways in which business firms decide what goods
to produce and what prices to charge.
1.3.3 MACRO ECONOMICS
Macro is also a Greek word meaning “Large” or pertaining
to the whole. Macro economics studies the economy as a
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whole. The subject matter of macroeconomics involves the
behaviour of the economy as a whole.
Macro economics deals with economic affairs in the
“Large”. It studies the character of the “forest” of economic
activities independent of the “tree” that compose it.
Macro economics studies things such as unemployment,
inflation, etc.
Macro economics is primarily concerned with the study of
fluctuations in the level of employment, aggregate income,
the general price level and the ways to prevent such
fluctuations. It is also interested in determining the
economy’s total output and its growth overtime.
1.3.4 MICRO/MACRO ECONOMICS
Students of economics must learn both branches very well
because it is not possible to understand economic
phenomenon without the knowledge of both micro and
macro economics. For example, studying the twin evils of
inflation and unemployment cannot be possible without
examining micro and macro issues such as aggregate level
of expenditure, pricing practices, behaviours of labour
unions etc.
However, one shall note that micro and macro economics
complement each other. It is not possible to analyze
economic issues without employing both fields.
1.4
SUMMARY
The distinction between micro and macro economics is not
a matter of wrong or right. This is because micro economic
theory depends on macro economic analysis, the total is
made up of the part. Therefore, they are complementary.
However, the basic distinction between micro and macro
economics deals with determination of relative prices and
allocation of resources among completing ends under full
employment condition. This largely depends on individual
demand and supply while macro economics on the other
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hand deals with determination of aggregate relative price
and allocation of resources among completing ends.
1.5
SELF ASSESSMENT EXERCISES
1. Explain micro and macro economics?
2. Describe the scope of micro and macroeconomics
3. State the relationship that exist between micro and
macro economics.
1.6
REFERENCES
Friedman, M. (1953): The Methodology Of Positive Economics
University of Chicago press. Pg 1-4.
Lange, O. (1946); The Scope And Method Of Economics.
1.7
SUGGESTED READINGS
Introduction To Positive Economics by R. G. Lipsey.
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TOPIC 2:
TABLE OF CONTENTS
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CIRCULAR FLOW OF INCOME
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2.3.1 CIRCULAR FLOW OF INCOME
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2.3.2 THE FLOW OF INCOME IN A TWO SECTOR
MODEL
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2.4
SUMMARY -
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TOPIC: CIRCULAR FLOW OF INCOME
2.1
INTRODUCTION:
The circular flow of income is the process where by the
national income and expenditure of an economy flow in a
circular manner continuously among economics agents
(households, firms, government etc.)
2.2
OBJECTIVES:
At the end of this topic you should be able to:
i.
Describes what circular flow of income is.
ii.
Describe the pattern of flow of National
income among economic agents in an
economy.
2.3
IN-TEXT
2.3.1 CIRCULAR FLOW OF INCOME
The circular flow of income provides a conceptual frame work
for describing the relationship among three economic variables,
that is to say output, income and spending (consumer
expenditures). Starting with the simplest economy without
external transactions and without government, the economy can
be considered as made of two kinds of economic institutions or
agents namely the households and firms.
2.3.2 THE CIRCULAR OF INCOME IN A TWO SECTOR MODEL
A household is an agent which own factors of production
and buys all final consumer goods.
A firms, on the other hand, owns nothing, but buys factors
of production from households, and pays any profit which it
makes on its activities as wages to households. This relationship
is illustrated as follows:
INCOME (Y)
Factors of Production
Households owns
factors of
production as
labour, land
Goods and services
Firms
Owns goods
and services.
Manufactured
goods
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Consumer expenditures
In the above illustration, two kinds of flow take place
between households and firm.
First, real things are supplied by household to firms and by
firms to household. Second, money passes between household
and firms in exchange for these real things.
Households supplies factors of production to firms, while
firms supply goods and services to households. Moving on the
opposite direction to these real flows are the money flows. Firms
pays income to households and households spend their income
on consumer goods.
Thus, the aggregate income (Y) is equal to the aggregate
expenditure (E).
E = I = value of output.
So far we have been working on the circular flow of income in a
two sector model of an economy.
2.3.3 THE CIRCULAR FLOW OF INCOME IN A THREE SECTOR MODEL
To do this we add the government sector so as to make it a three
sector closed model of circular flow of income and expenditure.
For this we add taxation and government purchases or
expenditure in our presentation. Taxation is a leakage from the
circular flow and government purchases are injections into the
circular flow.
The relationship is illustrated below:
Households
owns factors
of production
s
Government as
institution
producing social
functions
Firms own
goods and
services
Income to household
Consumer expenditure
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However, there are three features of the “real world” which are
not captured in the analysis of simple circular flow of income.
Thus are:
i.
ii.
iii.
2.4
Households typically do not spend all their income as
consumer goods. They also save part of their income.
Government consist of large institutions in the modern
world which tax individuals income and which use their
tax proceeds to pay large quantities of goods and
services from firms.
Economic activity is not restricted to trading with other
domestic residents, international trade, traveling and
capital movement are common in recent times.
SUMMARY
The circular flow of income describes the relationship that
exists among three key economic variables that is to say
output, income and spending by providing a conceptual
frame work for it. The concept gives a clear picture of the
economy in terms of movements of goods and services
among economic agent (potential consumer and producer
of economic goods and services)
2.5
SELF ASSESSMENT EXERCISES
1. Explain the concept of the “circular flow of
income”. In what ways do international
transaction affect this flow within a closed
economy?
2.6
REFERENCES:
M. L. JHIGAN: Micro And Macro Economics
Samuel, P. A. (1947): Foundation Of Economic
Analysis (Haward University Press. Pg 9).
2.7
SUGGESTED READINGS
Micro And Macro Economics by M. L. JHIGAN
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TOPIC 3
TABLE OF CONTENTS
PAGES
NATIONAL INCOME: CONCEPT, TERMS AND
MEASUREMENT -
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3.1
INTRODUCTION -
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3.2
OBJECTIVES
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3.3
IN-TEXT
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3.3.1 THE CONCEPT OF NATIONAL INCOME
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3.3.2 THE TRADITIONAL DEFINITION -
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3.3.3 THE MODERN DEFINITION -
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3.3.4 CONCEPTS OF NATIONAL INCOME
3.3.5 MEASUREMENT OF NATIONAL INCOME
3.3.6 NATIONAL INCOME EQUILLIBRIUM
DEFINIATION: THE TWO SECTOR MODEL
3.4
SUMMARY -
3.5
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SELF ASSESSMENT EXERCISE
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3.6
REFERENCES
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TOPIC: NATIONAL INCOME: CONCEPT, TERMS AND
MEASUREMENT
3.1 INTRODUCTION:
National income is an uncertain term which is used
interchangeably with National dividend, national output and
National expenditure. On this basis, national income has
been defined in a number of ways. In common parlance,
National income means the total value of goods and services
produced annually in a country over a specified period of
time usually a year.
3.2 OBJECTIVES:
At the end of this topic you should be able to:
i.
Understand the concept, terms of national income
ii.
Understand various methods of measuring national
income
3.3 IN-TEXT:
3.3.1 THE CONCEPT OF THE NATIONAL INCOME
The concept if national income is seen by many people in
different perspectives. It is used interchangeably with
national dividend, national output or national expenditure.
As a result, there are so many definitions of the term.
In common usage, the term means the total value of goods
and services produced annually in a country over a period of
one year. It includes payments made to all resources as in
wages for labour, rent for land, interest for capital and
profit for the entrepreneur.
Technically, the definition of national income is classified
into two:
i.
The traditional definitions.
ii.
The modern definition.
3.3.2 THE TRADITIONAL DEFINITION:
These are definitions advanced by Marshal, Pigou and fisher.
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To marshal, the labour and capital of a country annually
produce certain net aggregate of commodities, materials and
immaterial things including services of all kinds etc. This is
the true net national income or revenue of the country or
national dividend.
Pigou, a devoted follower of marshalian thinking included
the use of money as a measure of national income to the
earlier definition made by marshal. To him, “national
income is that part of objective income of the community
including of course income dividend from abroad which can
be measured in money”. This definition proved to be more
practical than the marshalian definitions. This is because the
use of money as a measure of national income may prevent
double counting the value of a product.
Fisher, completely deviated from the marshalian and
pigourvian definitions of National income. He uses consumption”
as the criterion of national income as opposed to marshalian and
pigourian use of “production” as a measure of national income.
To him, the national income dividend or income consists solely
of services as received by ultimate consumers, whether from
their material or human involvements. Thus, a piano or an over
coat made for me this year is not part of this year’s income, but
an addition to capital. Only the services rendered to me this year
by this things constitute income”.
Fisher’s definition of national income is considered to be
more adequate than that of marshal or pigou, because Fisher’s
definition provides an adequate concept of economic welfare
which depends on consumption and consumption represent
standard of living.
However, the marshalian and pigouvian definitions give the
reasons influencing economic welfare where as Fisher’s
definition helps in comparing economic welfare in different
years.
3.3.3
THE MODERN DEFINITION:
From the modern point of view, Simon Kuznet defined
national income as the “net output of commodities and services
flowing during the year from the country’s productive system in
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the hands of the “ultimate consumers”. The United Nations, in
one of its reports, defined national income as the net national
product, as addition to the shares of different factors and as net
national expenditure in a country in a year’s time.
The definitions advanced by both marshall and pigou,
Fisher, and Kuznet should be considered to be because all
are considered to give same result of national income when
estimated.
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3.3.4 CONCEPT OF NATIONAL INCOME
There are a number of concepts that are associated with
national income accounting. Common among such concepts
are:
ii.
Gross National Product (GNP)
iii. Net National Product (NNP)
iv.
Personal Income
v.
Disposable Income
vi. Per Capita Income etc.
1.
GROSS DOMESTIC PRODUCT:
This is the total measure
of the flow of goods and services at market value resulting from
current production during a year in a country, including net
income from abroad. Gross National Product (GNP) is a measure
of money in which all kinds of goods and services produced in a
country during one year are measured in terms of money at
current prices and then added together. In estimating (GNP)
however, the market prices of only the final product should be
taken into account.
2.
NET NATIONAL INCOME (NNP):
This process of
production uses up to a certain amount of fixed capital. Some
equipments wear out, meaning that other components are
damaged or destroyed. This is what is considered as depreciation
or capital consumption allowance. In order to arrive at net
national product (NNP), we deduct depreciation from GNP that
is to say NNP = GNP – depreciation.
3.
PERSONAL INCOME: Personal income is the total income
received by individuals of a country from all sources. Personal
income is never equal to national income because personal
income includes transfer payments therefore, transfer payments
are normally not included in national income. Personal income is
derived from national income by deducting undistributed profits,
profit taxes etc.
4.
DISPOSABLE INCOME:
Disposable income or personal
disposable income means the actual income which can be spent
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on consumption by individuals and families. To obtain disposable
income, direct taxes are deducted from personal income. The
whole of disposable income is not spent on consumption because
part of it is annually saved. Therefore, disposable income is
divided into consumption expenditure and savings.
5.
PER CAPITA INCOME:The average income of the people of a
country in a particular year is called per capita income for that
year. This concept also refer to the measurement of income at
current prices and at constant prices. For instance, in order to
find out the per capita income for 1990, at current prices, the
national income of a country is divided by the population of the
country in that year. That is to say per capita income for 1990.
=
National income 1990 divided by the
Population in 1990
The concept of per capita income enables us to know the average
income and the standard of living of the people. But the concept
is not very reliable because in every country due to unequal
distribution of national income, a major proportion of it goes to
the richer section of the society and thus income received by the
common man is lower than the year’s per capita income.
3.3.5 MEASUREMENT OF NATIONAL INCOME
There are four known methods of measuring national
income. The choice of the method depends largely on data
availability and the economic circumstances prevailing in
the economy or country.
The four method of national
estimation are:
i.
Product method
ii.
Income method
iii. Expenditure method
iv.
Value added method
i.
income
measurement
THE PRODUCT METHOD: This method uses the market
prices of final goods and services produced in a country
during a year. The data of all productive activities such
as agricultural products, manufactured products, the
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contribution of transportation, communication, doctors,
teachers etc, are collected and assessed at market prices.
Here, only the final goods and services are considered,
while intermediate or semi-finished goods are excluded.
INCOME METHOD: Here, the net income payments of
the citizens of a country in a particular year are
considered. Eg. Net wages, net interest and net profits of
the citizens are considered while transfer payments are
excluded.
ii.
iii.
ENPENDITURE
METHOD:
Here,
the
personal
consumption expenditure, net domestic investment,
government expenditure on goods and services and net
foreign investment are considered. Here, it is believed
that national income is equal to national expenditure.
iv.
VALUE ADDED METHOD: Another method of measuring
national income is the value added by industries. The
differences between the value of materials output and
inputs at each stage of production is the value added. If
all such differences are added up for all industries in the
economy, we arrive at the Gross domestic product.
3.3.6 NATIONAL INCOME EQUILIBRIUM DETERMINATION:
TWO SECTOR MODEL ECONOMY
Y=C+I
C = 90 + 6yd
Where Y = national income, C = Consumption
90 = autonomous consumption, Yd = disposable income, 6
= marginal propensity to consume.
If C = 85 + 0.9y
I = 55
Determine:
i)
Equilibrium income
ii)
Level of consumption
iii) Marginal propensity to consume
iv) Autonomous consumption
v)
Present your findings on a befitting graph.
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Equilibrium income.
Y=C+I
Y = 85 + 0.9y + 55
Collect like terms
Y – 0.9y = 85 + 55
Y(1-0.9) = 140
0.1y = 140
Y = 140
0.1
Y = N1400
(ii)
Level of consumption
C = 90 + 6y
C = 85 + 0.9y
C = 85 + 0.9 (1400)
C = 85 + 1260
C = N1345
Prof: Y = C + I
1400 = 1345 + 55
1400 = 1400
(iii) Marginal propensity to consume
B = ∆C
∆Y
= 1345
1400
B = 0.9
Or ∆C = d
∆C
∆Y
(85 + 0.9y)
= 0 + 0.9 (y1 – 1)
= 0 + 0.9y0
= 0.9
(iv) Autonomous consumption
C = 90 + 6y
90 = C – 6y
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90 = 1345 – (0.9 x 1400)
90 = 1345 – 1260
90 = N85
(v)
GI
Y=E
Y = C + I = 1400
1400
C = a + by = 1345
1345
90 = 85 a
0
I = 55
45
o
1345
1400
Y
3.4 SUMMARY:
National income means the total value of goods and
services produced annually in a country. In other words, it
is the total amount of income accruing to a country from
economic activities in a year’s time. The definition of
national income is classified into two; namely the
traditional and modern definition. The traditional
definitions advanced by marshal, pigou and Fisher tells us
the reasons influencing economic welfare and compares
economic welfare in different years, where as the modern
definition advanced by Kudnets and United Nation defined
national income as the net output of commodities and
services flowing during the year. However, for clarity sake
different concepts has been used to explain the term
national income. Such concepts include Gross Domestic
Product (GDP), Gross National Product (GNP) Net National
Product (NNP) etc.
3.5 SELF ASSESSMENT EXERCISES
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1. Explain the various concepts of national income.
Under what circumstances does national income tend
to be underestimated?
2. What do you understand by the term “National
income”. Explain the product and expenditure
approaches of computing national income.
3. Discuss the traditional and modern definitions of
national income, explaining their differences and
interrelationships.
4. Point out the differences between the following
concepts of national income.
a. Gross national product and net national product
b. Net national income at market prices and Net
national income at factor prices.
c. Net national product and net domestic product
d. Disposable income and personal income.
5. Given Y = C + I where C = 55, I = 100
I = Investment
C = Consumption, where Y = national income
90 = autonomous consumption
Find
a.
Equilibrium National income
b. Consumption level
c. Marginal propensity to consume and
d. Depict your findings on a befitting
graph.
3.6 REFERENCES:
Koopman, I. C “Measurement without Theory”, Review Of
Economic And Statistics (1947) pg (161-72).
Samuelson P. A., Foundation of Economic Analysis
(Haward University) press, (1947).
Samuelson P. A. “Economic Theory and Mathematics: An
Appraisal”, American Economic Review (1952) pg 56-66.
3.7 SUGGESTED READINGS
Samuelson P. A. “Economic Theory and Mathematics: An
Appraisal”, American Economic Review (1952) pg 56-66.
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TOPIC 4:
TABLE OF CONTENTS
PAGES
4.0
ECONOMIC GROWTH AND ECONOMIC
DEVELOPMENT -
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4.1
INTRODUCTION -
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4.2
OBJECTIVES
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4.3
IN-TEXT
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4.3.1 ECONOMIC GROWTH -
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4.3.2 SOURCES OF GROWTH
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4.3.4 IMPEDIMENTS TO DEVELOPENT -
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4.4
SUMMARY -
4.5
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4.3.3 DEVELOPED AND UNDERDEVELOPED
COUNTRIES
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SELF ASSESSMENT EXERCISE
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4.6
REFERENCES
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4.7
SUGGESTED READINGS
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TOPIC: ECONOMIC GROWTH AND ECONOMIC
DEVELOPMENT
4.1
INTRODUCTION:
3
This section discusses economic growth and economic
development. Economic growth refers to the growth in
national income, while economic development depict
growth and structural changes in the economy.
4.2
OBJECTIVES
At the end of this topic you should be able to:
i.
Define economic development and
economic growth.
ii.
Know the differences between the two
concepts
4.3
IN-TEXT
4.3.1 ECONOMIC GROWTH
1.
It can be referred to growth in national output as
measured by the Gross Domestic Product (GDP) or
2.
it can referred to growth in individual standard of living
as measured by Gross National Product per capita. Thus,
total output of a given country grows because output per
person grows.
Growth in national output measures economic power of a
given nation. On the other hand, growth in individual
standard of living measures the well being of the citizens of a
country.
Theories of economic development analyze why some
countries have failed to grow or develop and what strategies
would promote faster economic growth.
4.3.2 SOURCES OF GROWTH
Here, it is useful to distinguish between two types of
growth namely extensive growth and intensive growth.
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i. EXTENSIVE GROWTH:
Extensive growth is growth in
output resulting from increasing in inputs. For example, if
employment of labour increases by 10 percent, output also
grows by this percentage.
ii. INTENSIVE GROWTH:
Intensive growth results from
improvements in factor quality, for example better education
of the labour force, technology etc. Walter Rostow, an
economic Historian who studies economic growth, gave pre
conditions necessary for a country to take off. By “take off”
He meant to move from a low level of development to
sustained industrialization and economic growth.
He presented four pre-conditions for development to occur.
These pre-conditions are as follows:
i.
Entrepreneurs with enough capital to start small
businesses. This class of entrepreneur must be well
educated, urbanized and have adequate financial
resources.
ii.
Adequate workforce: Large part of the workforce must
be literate /educated to enable them work in modern
factories. The workforce must be able to write, read and
understand written materials.
iii. Adequate infrastructure: Good transport system,
communication etc, must exist to facilitate economic
interaction within the country. Electricity and water
supply must be reliable.
iv.
An appropriate institutional environments: Effective
rule of law must be available. Political stability and
social order are also important part of the environment.
If these pre-conditions are not met, development is
impended.
ECONOMIC DEVELOPMENT
The term development may mean different things to
different people. It is important at the outset that we have
some working definition or core perspective on its
meaning. According to traditional economic measures,
development means the capacity of a national economy,
whose initial economic condition has been low or static for
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a long time, to generate and sustain an annual increase in
its Gross Domestic Product (GDP). There are, however,
three cores values of development.
CORES VALUES OF DEVELOPMENT
There are three cores values of development
4
Life sustenance: The ability to meet basic needs.
5
Self esteem: To be a person and
6
Freedom from servitude: To be able to choose. This
implies that a country is said to be developing
economically if it can.
i.
Increase the availability and widen the distribution of
basic life-sustaining goods and services such as food,
shelter, health and protection.
ii.
Raise the levels of living including in addition to higher
incomes, the provision of more jobs, better education
and greater attention to cultural and human values, all
of which will serve not only to enhance materials well
being but also to generate greater individual and
national self esteem and
iii. To expand the range of economic and social choices
available to individuals and nations by freeing them
from servitude and dependence not only in relation to
other people and nation states but also on the forces of
ignorance and human misery.
4.3.3
DEVELOPED AND UNDERDEVELOPED COUNTRIES:
The
developed
countries are those that have obtained a relatively high
material standard of living. Traditionally, developed
countries include the industrialized nations in North
America, Europe and Japan.
The under developed or developing countries are
countries that relatively have low standard of living.
Among countries that are under developed, we have South
America (Venezuela, Colombia, Argentina etc.) and the
Caribbean’s. others include countries of Africa such as
Nigeria, Niger, Chard, Uganda Ethopia, Egypt and the
Sudan. These countries are sometimes referred to as
“developing countries” or less developed countries”.
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3
IMPEDIMENTS TO DEVELOPMENT
Population growth
Capital accumulation
Other issues such as national resources endowment of the
country and cultural and social values in the
development process.
ENHANCING THE POTENTIAL FOR DEVELOPMENT
There is a need to enhance a nation’s potential for
development. For a nation to developed some things have to be
done. These includes:
To overcome the obstacles to development
Re-focusing expenditure on education
Family planning i. e voluntary or corresive
Infrastructural development
Reforming the rule of law
Encouraging the development of financial market and
Political stability.
4.4
SELF ASSESSMENT EXERCISES:
1. Distinguish between economic growth and economic
development.
2. What are the cores values of economic development?
4.5
SUMMARY
Economic growth can mean two things. It can be referred
to as growth in national output as measured by the Gross
Domestic Product (GDP) or it can be referred to as growth
in individuals standard of living. Economic development on
the other hand means or may be defined as growth plus
structural changes in the economy.
4.6 REFERENCES:
Michel P. Todaro and Stephen Smith Theory of Economic
Development 8th edition (2003)
ML Jhingan Economic Development and Planning 36th revised
edition, 1997 chapter 52.
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C. P. Kindleberg and Helrich B. Economic Development pg 7580.
4.7
SUGGESTED READINGS:
Michel P. Todaro and Stephen Smith “Theory of Economic
Development” 8th edition (2003)
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TOPIC 5:
TABLE OF CONTENTS
PAGES
5.0
FISCAL POLICY -
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5.1
INTRODUCTION -
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5.2
OBJECTIVES
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5.3
IN-TEXT
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5.3.1 DEFINITION OF FISCAL POLICY -
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5.3.2 IMPLEMENTATION OF FISCAL POLICY
5.3.3 OBJECTIVES OF FISCAL POLICY 5.4
SUMMARY -
5.5
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SELF ASSESSMENT EXERCISE
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5.6
REFERENCES
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5.7
SUGGESTED READINGS
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TOPIC: FISCAL POLICY
5.1 INTRODUCTION:
This section discusses fiscal policy. Fiscal policy is one of
the major policies which government uses to regulate the
affairs of the economy.
5.2 OBJECTIVES:
At the end of this topic you should be able to:
i.
Define what fiscal policy is.
ii.
Understand the pattern of government
generation and expenditure.
revenue
5.3 IN-TEXT
5.3.1 DEFINATION OF FISCAL POLICY
The term fiscal policy refers to the part of government
policies concerning the raising of revenue through taxation
and other means and deciding on the level and pattern of
expenditure for the purpose of influencing economic goals.
Fiscal policy therefore can be use for the allocation,
stabilization and distribution of resources in an economy.
In essence, the primary objective of fiscal policy is to
balance the use of resources of the public and private
sectors and by so doing, to avoid inflation, unemployment,
balance of payments pressures and income inequality.
5.3.2 IMPLEMENTATION OF FISCAL POLICY
Fiscal policy is implemented through budgets. A budget is a
financial statement of the sources of income (revenue) and
its uses (expenditure) of the government. When the
governments expenditure is equal to its revenue, a
balanced
budget
is
obtained.
When
government
expenditure is greater than its revenue, we have a deficit
budget, but when government expenditure is less than its
revenue, we have a surplus budget.
Government may deliberately plan for a deficit budget or
surplus as a way of influencing economic activity. When for
example an economy is in recession, the government can
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budget for a deficit budget. Such a deficit can come about
in three ways.
Reducing taxes:- A decrease in tax will increase
individual disposable income. This will increase
aggregate spending and hence national income.
Increasing government component of aggregate demand.
This is done by increasing its expenditure on projects
like roads, hospitals etc. More employment will be
created and through the multiplier aggregate demand
will rise.
Subsidizing firms: - The government can subsidize firms
so that they may be able to invest more and there by
increase their own component of aggregate demand.
If however, the economy is going through a period of
inflation, the government can budget for surplus
budget. Such a surplus budget can be brought about in
three ways.
a. Increasing taxes:By
increasing
taxes,
individual
disposable income will decrease and aggregate spending
will fall.
b. Reducing expenditure:The government can reduce its
own expenditure on projects. The multiplier effect of this
will lead to reduction in government component of
aggregate demand, hence national income.
c. Reducing grants to firms:- By
reducing
grants
and
subsidies to firms, the government will be curtailing their
ability to invest. This will reduce their component of
aggregate demand hence national income.
5.3.3 OBJECTIVES OF FISCAL POLICY
An extensive use of fiscal policy is indispensable for
economic development. The major goals of fiscal policy are:
a.
To increase employment opportunities:- Fiscal policy
aims at increasing employment opportunities and
reducing unemployment and underdevelopment. For
this, the nation expenditure should be directed toward
providing social and economic over heads.
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b.
c.
d.
e.
f.
3
To promote economic stability:- Fiscal policy promotes
the maintenance of reasonable economic stability in the
face of short run international stability.
To control inflation:- Fiscal policy aims at counteracting
inflationary tendencies inherent in an economy.
To increase the rate of investment:- Fiscal policy aims
at the promotion and acceleration of the rate of
investment in the private and public sectors of the
economy.
To ensure growth of national income:- Fiscal policy
aims at promoting or increasing the national income of
an economy.
To improve equilibrium, balance of payment etc.
5.4 SUMMARY
Fiscal policy is the use of government expenditure and
taxation to control the level of economic activities. In
essence, the primary objective of fiscal policy is to balance
the use of resources, of both the private and public sectors
and by so doing to avoid inflation, deflation,
unemployment, balance of payment pressures, and income
inequality.
5.5 SELF ASSESEMENT EXERCISES
1 What is fiscal policy? Distinguish clearly between the three
main types of discretionary fiscal policy.
2. Define and discuss the objectives of fiscal policy in a
developing economy like Nigeria.
3. Discuss fiscal policy as a device for controlling the level of
economic activity.
5.6 REFERENCES:
Pfouts, R. W. and C. E. Ferguson “Theory of operationalism
and policy”. Southern Economic Journal (1961).
M L Jhighan, Monetary Policy And Fiscal Policy fifth revised
edition.
5.7
SUGGESTED READINGS:
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M L Jhighan, Monetary policy and fiscal policy fifth revised
edition.
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TOPIC 6:
TABLE OF CONTENTS
PAGES
6.0
MONEY AND BANKING
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6.1
INTRODUCTION -
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6.2
OBJECTIVES
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6.3
IN-TEXT
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6.3.2 QUALIFICATION OF GOOD MONEY
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30
6.3.3 FUNCTION OF MONEY
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6.3.4 BANKS
--
6.3.1 DEFINITION OF MONEY
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6.3.5 TYPES OF BANKS
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6.3.6 COMMERCIAL BANKS -
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6.3.6.1
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29
FUNCTIONS OF COMMERCIAL BANK 33
6.3.7 ROLE OF COMMERCIAL BANKS IN NIGERI -
34
6.3.8 PROBLEMS OF COMMERCIAL BANKS IN
NIGERIA
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34
6.4
SUMMARY -
6.5
SELF ASSESSMENT EXERCISE
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6.6
REFERENCES
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35
6.7
SUGGESTED READINGS
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-
35
-
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TOPIC: MONEY AND BANKING
6.1
INTRODUCTION
3
Money is a device that is generally acceptable as a medium
of exchange. Banking is an institution that deals in money
and other assets of value.
6.2
OBJECTIVES
At the end of this topic you should be able to:
i.
Define money and banking.
ii.
Understand what is meant by money and banking.
6.3
IN-TEXT
6.3.1 DEFINITION OF MONEY
Money has been defined in many ways. Some say money is
what money does. In other words, anything that performs
the function of money is money. In a wider sense, the term
money includes all media of exchange. Gold, Silver, Copper,
Paper, Cheques, Bills etc, have been called and used as
money. The most commonly accepted view about money is
that “all medium of exchange and payments, whose
acceptance is legally backed by law may be properly called
money.” Another definition of money is that “money is
anything which is universally accepted in the discharge of
business obligations because it acts as a measure of value
of all other commodities.
Money may be metallic or in paper. Metallic money
are pieces of coins of metal of particular fineness and
weight with both sides stamped with the symbol of the
government, while the paper money applies to bank notes
and government notes which pass from hand to hand
without difficulty.
6.3.2
QUALITIES OF A GOOD MONEY
In order to perform its functions most efficiently, the
money material used must have certain qualities. Such
qualities include:
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1.
General acceptability:- A commodity which is not
universally accepted in a country cannot serves as
money satisfactorily .
2.
Portability: The material used for money or money
should be easily transported from one place to
another.
3. Cognisability:
Cognisability is another essential
quality of money. Cognisability implies that money
must be easily recognized.
4.
Divisibility:
Money should be capable of being
divided into smaller part without loss of value.
5.
Durability: Perishable goods/commodities are not
good for money.
6.
Homogeneity: The material used for money should be
of uniform quality. If the quality is not uniform, it
will not contain the same value in the same bank.
7.
Above all money should be comparatively stable in
value, since it has to serve as standard for measuring
value.
6.3.3
FUNCTION OF MONEY:
Different commodities such as gold, silver, coins, and later
paper have been used as money. The following are part of
the functions of money:
i.
Medium of exchange
ii.
As a store of value
iii. A unit of account
iv.
A measure of value
v.
A standard of payment
vi.
Money also serve as a differed means of payment.
iii. Money as a
medium of exchange:
money solves the difficulties of barter
system. Money serves as a means
through which exchange of goods and
services take place.
iv.
Money serves as a store of wealth or
liquid assets:
Money also serves as
store of values, or more correctly, it
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vi.
6.3.4
3
enables a person to keep a portion of his
liquid assets.
Money
as
standard
for
differed
payment:
Money also serves as a
standard of payments made after a lapse
of time.
Money also serves as a means of
transferring values: This is another
function which money performs. One
can sell one’s immovable and movable
belonging at one place and buy them
elsewhere.
BANKING:
Bank is an institution which deals in money. Broadly
speaking bank drains surplus money from the people who
are not using it at the same time and lend to those who are
in position to use it for productive purpose.
6.3.5
TYPES OF BANKS:
Considerable specialization has taken place among banks
with regards to the various sphere of their activities. The
main type of bank are the following:
a. Commercial banks:- Commercial banks are chiefly
engaged in financing internal trade and also carry on
other ordinary banking business of receiving deposits,
advancing loans and discounting bills.
b. Industrial banks: These banks specialize in financing
of industries. They advance loans for long period to
people who carry on industrial enterprise.
c. Agricultural banks:- Agricultural banks give long and
short term finance to agriculturalists.
d. Exchange banks:- The main function of exchange
bank is to buy and sell foreign currencies.
e. Saving banks:- These banks provides facilities to
people usually of limited financial resources to save
their money. For example post offices in Nigeria carry
on this function.
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f. Central bank:- Central bank is the most important
banking institution in a country. It directly or
indirectly controls the activities of the other banks.
Most of the functions of the banks belong to this
categories.
6.3.6
COMMERCIAL BANKING
Broadly speaking, there are three main functions which
banks
other than central banks perform (1) Receiving
deposits (2) advancing loans and (3) Discounting bills
of exchange. They are directly engaged in financing
internal trade, and also carry on other ordinary banking
business.
6.3.6.1 FUNCTION OF COMMERCIAL BANK
Commercial bank perform the following functions:i.
Commercial bank create credits:Commercial bank
create credit by
accepting special deposit and giving
loans to their customers.
ii.
Commercial banks accept deposits:- Commercial bank
receive money from their customers.
iii. Commercial banks act as agent to their customers:- They
collect cheques, bills of exchange and other things on
behalf of the customers.
iv.
A commercial bank finances foreign trade of its customers
by accepting foreign bills of exchange and collecting them
from foreign banks. It also transacts other foreign
exchange businesses and buys and sells foreign currency.
v.
Credit creation:- credit creation is one of the most
important function
of commercial banks. Like other
financial institutions, commercial banks are profits
oriented. For this purpose, they accept deposit and advance
loans by keeping a small cash in reserve for day to day
transaction.
Besides the above noted services, the commercial bank
perform a number of other functions. A commercial bank acts as
the custodian of the valuables of its customers by providing them
lockers where they can keep their Jewellery and valuable
documents. It issues various form of credit instrument such as
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cheque, drafts, travelers cheque etc, which facilitate
transactions. The bank also issues letter of credit and act as
reference to its customers. It underwrites shares and debentures
of companies and helps in the collection of funds from the
public. Some commercial banks also publish journals which
provide statistical data/information about the money market and
business trends of the economy.
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3
ROLE OF COMMERCIAL BANKS IN NIGERIA
The role of banking in economic development are many.
These includes:i.
Supply of necessary money for investment by the
business sector for growth and development.
ii.
Promotion of the development of special banks for rapid
economic development.
iii. Management of foreign reserves in order to promote the
necessary development in releasing the scarce resources
for right priority project.
iv.
Promotion of export trades to earn necessary foreign
exchange.
v.
Reduction of unemployment by providing/monotint
employment generation activities.
vi. It assists in monetary policy.
vii. Financing of various sectors of the economy etc.
6.3.8
PROBLEM OF COMMERCIAL BANKING IN NIGERIA.
i.
ii.
iii.
iv.
6.4
Most of the Commercial banks are foreign banks and are
less interested with the ordinary needs of a common
man.
Most Nigerians cannot easily offer acceptable collateral
securities needed by the banks before they grant loans.
Money default as far as repayments of borrowed money
are concerned leading to banks reluctance to leading
money to customers.
The commercial banks are mainly located in urban areas
and with this the rural drivellers tend to be ignorant of
banking services.
SUMMARY
Money is any commodity that facilitates exchange of goods
and services. It is a commodity that overcomes the
disadvantages of barter. A bank on the other hand is an
institution which accept deposit from the public in form of
advances loans by creating credit.
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SELF ASSESSMENT EXCERSICES
1.
2.
3.
4.
6.6
3
What is a commercial bank? Discuss the various
functions performed by a commercial bank.
Discuss the role of commercial banking in promoting
economic development.
Define money. What is its social significance?
“Money is a good servant, but a bad master” examine
this statement.
REFERENCES
M. L. Jhinghan Monetary Economics 5th revised edition
Prouts R. W. and C. E. Ferguson “Theory of
operationalism and policy” Economic Journal 1951.
6.7
SUGGESTED READINGS
M. L. Jhinghan Monetary Economics 5th revised edition
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TOPIC 7:
TABLE OF CONTENTS
PAGES
7.0
INTERNATIONAL TRADE
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7.1
INTRODUCTION -
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37
7.2
OBJECTIVES
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7.3
IN-TEXT
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7.3.1 DEFINITION OF INTERNATIONAL TRADE
7.3.1.1
ADVANTAGES OF INTERNATIONAL TRADE
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7.3.2 THEORIES OF INTERNATIONAL TRADE
7.3.2.1
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COMPARATIVE COST ADVANTAGE
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THE THEORY OF ABSOLUTE COST
ADVANTAGE
7.3.2.2
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7.4
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7.5
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SELF ASSESSMENT EXERCISE
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7.6
REFERENCES
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7.7
SUGGESTED READINGS
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7.1
3
TOPIC: INTERNATIONAL TRADE
INTRODUCTION
This section discusses international trade. International
trade is the exchange of goods and services between
countries or nations so as to create a smooth relationship
between countries involved.
7.2 OBJECTIVES
At the end of this topic you should be able to:
i.
Define what international trade is.
ii.
Explore the various theories propounded
Economists on the theory of international trade.
by
7.3 IN-TEXT
7.3.1 DEFINITION OF INTERNATIONAL TRADE
International trade is the exchange of goods and services
between two or more countries so as to create a smooth
relationship between countries involved. However,
international trade is more of international relations than
international trade itself.
7.3.1.1 ADVANTAGES OF INTERNATIONAL TRADE
i.
ii.
iii.
iv.
v.
vi.
It brings about specialization
It generate revenue to the government.
It assists in the efficient allocation of resources and
factors of production.
It offers employment opportunities.
It creates competition among countries.
There is also political and social benefits in
international trade.
7.3.2 THEORIES OF INTERNATION TRADE
There are many theories of international trade. We
distinguish between the absolute cost advantage and
comparative cost advantage.
7.3.2.1 THE THEORY OF ABSOLUTE COST ADVANTAGE.
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This theory was propounded by Adam Smith. Adam Smith,
the acclaimed father of Economics stressed that a country
could gain by trading. According to him, the tailor does not
make his shoes and the shoe maker does not make his suit.
Smith argued in the same manner, that a country could
gain from trade if it concentrated in the production of
commodities in which it has absolute cost advantage
compared to other countries or where its efficiency lies.
Then nations can gain from trade by specializing in the
commodity in which they have absolute cost advantage. For
example, if Nigeria happens to be efficient in the
production of cloth, and England is efficient in the
production of wheat, it shows that Nigeria has an absolute
cost advantage in the production of cloth than wheat and
England has an absolute cost advantage in the production
of wheat than cloth. So according to the theory, each of the
nations should specialize in the production of the
commodity of its absolute cost advantage and exchange the
surplus for its absolute disadvantage. Let us consider the
following to illustrate.
Table 1
Commodities
Wheat (A)
unit
Cloth (B)
Nigeria
20
12
England
10
Resources used
1
20
1 unit
From the above illustration, Nigeria produces 20 units of
commodities “A” with one unit of resources while England
produce 10 tones of the same commodity with the same unit of
resources (A). On the other hand, Nigeria produces 12 (Yards) of
commodities (B) with one unit of resources, while England
produces 20 yards of the same commodity with the same unit of
resources. Therefore, Nigeria has absolute cost advantage in the
production of commodity (A) over England, while England has
absolute cost advantage in the production of commodity (B)
compared to Nigeria.
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7.3.2.2 COMPARATIVE COST ADVANTAGE
This law was first formulated by the great economist David
Richardo (1772 – 1823). Richardos’ argument became more
popular among economists. He used a model clearly stating their
assumption and implications in explaining the theory.
According to this theory, if one nation is less efficient than
the other in the production of both commodities or in all lines of
production, there is still basis for mutual trade to take place
between the two countries. The country that has an absolute
least advantage should specialize in that line of production and
import the commodity in which its absolute disadvantage is
greater. This theory shows that trade and work to raise
productivity. For example
Table 2
Commodities
Wheat (A)
10/5 = 2
Cloth (B)
0.5
Nigeria
100
60
60/100 = 0.6
100/60 = 1.66
England
5
10
5.10 =
Table 2 shows that Nigeria has absolute advantage in the
production of both commodities, that is wheat and cloth. Though
it has absolute advantage in both line of production, there is
need for trade between Nigeria and England because the margin
of advantage differs in the two commodities.
Nigeria can produce (20) times as much wheat than
England using the same quantity of resources but only six times
as much cloth. Nigeria is said to have a comparative advantage
in the production of wheat and comparative disadvantage in the
production of cloth and while England can be said to have a
comparative advantage in the production of cloth.
Habeiler (1936) used the opportunity cost theory to explain
further the theory of comparative advantage. In this form, the
law is sometimes referred to as law of comparative cost. From
table 2, let’s calculate the opportunity cost for wheat and cloth
for the two countries.
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The opportunity cost of a good is the quantity of other goods that
must be sacrificed to make one or more units of that good. It
tells about the relative cost of producing different goods. If
resources are assumed to be fully employed, the only way to
produce more of one commodity is to re-allocate resources and
thus produce less of the other commodities. The opportunity cost
of producing wheat in Nigeria is (60/100 = 0.6) while the
opportunity cost of producing cloth in Nigeria is 100/60. The
opportunity cost differs in both countries and both countries are
producing both commodities. Based on this, it is always possible
to produce to increase production of both by suitable reallocation of resources within each country. There are gains
from trade given the opportunity cost as given in table 2. To
produce one more tones of wheat, Nigeria must sacrifice 0.6
yards of cloths. To produce one more yard of cloth, England most
sacrifice (0.5) tones of wheat.
7.4 SUMMARY
International trade is the exchange of goods and services
between two or more countries so as to create a smooth
relationship between countries involved in it. Countries,
however engage in international trade in order to gain from such
trade. As a result of this, various theories have been postulated
by various economists to explain its operations. Among such
theories, we distinguish the cost advantage by Adam Smith,
comparative cost advantage by David Richardo, etc.
7.5 SELF ASSESSMENT EXERCISES
1. What do you understand by international trade? Why
do countries engage in trade.
2. Discuss briefly the theories of:
a.
Absolute Advantage
b.
Comparative Advantage.
7.6 REFERENCES
Robbin, L; An Essay On The Nature And Significance Of
Economic Science (Macmillian 1936).
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Friedman, M. (1953); The Methodology Of Positive
Economics; university of Chicago press pp1-4
Pfout T and Buchanon J. M., “principle of international
finance” Southern Economic Journal (1958).
7.7 SUGGESTED READINGS
Pfout T and Buchanon J. M., “principle of international
finance” Southern Economic Journal (1958).
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SOLUTION TO EXERCISES
TOPIC 1
a. Explain micro and macro economics.
These are major branches of economics. Microeconomics deals with individual economic units such as
individual consumption, demand, etc. on the other hand,
Macro-economics deals with aggregate economic variables
such aggregate demand, inflation, unemployment, etc.
b. Describe their scope.
The scope of micro-economics is normal individual
economic units. It studies individual economic parts such
as households, firms, markets, etc.
Macro-economics determines the manner in which
consumers allocate services; it further determines the
swap in which firms decide what goods to produce and
what price to charge.
c. State the relationship that exist between micro and macro
economics.
To understand economic phenomenon very well, both
micro and macro economics must be understood properly.
Without the knowledge of both micro and macro
economics, it is not possible to understand the working of
an economy.
Micro and Macro economics complements each other.
TOPIC 2
Circular flow of income provides a conceptual framework
for describing the relationship among three key economy
variables that is to say incomes and spending (consumer
expenditure). It explain inter dependency among economic
agents as far as the movement of goods and services is
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concern. However, in a closed economy, government does not
intervene in the production and consumption of goods and
services. The economy can be considered as made of two
kinds namely the households and firms.
A household is an agent which owns factor of production
and but all final consumer goods. A firm on the other hand,
owns nothing, but hires factor of production from household,
sells the goods which it produces to household and pays any
profit which it makes on its activities on wages to households.
TOPIC 3
i.
i.
ii.
iii.
iv.
i.
ii.
iii.
Explain the various concepts of national income, under
what circumstances does national income tend to be
under estimated.
National income means the total value of goods and
services produced annually in a country. In other
words, it is the total amount of income accruing to a
country from economic activities in a years time. The
concept of national income includes:
Gross National Product (GNP)
Net National Product (NNP)
Personal income
Disposable income.
Gross National Product:- This is the total measure of the
flow of goods and services at market value resulting
from current production during a year in a country
including net income from Abroad.
Net National Product:- Net national product is the Gross
National Product less depreciation
NNP = GDP – Depreciation.
Personal income:- Personal income is the total income
received by individuals of a country from all sources.
Personal income is derived from national income by
deducting undistributed profits, profit taxes etc.
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ii.What do you understand by the “national income”. Explain the
product and expenditure approach of computing national
income.
National income is the total value of goods and services
produced annually in a country. It is often used
interchangeably with national dividend, national output
or national expenditure. It includes all payment to all
resources in wages for labour, rent for land, interest for
capital and profit for te entrepreneur. There are
however various methods of measuring national income.
These include product, expenditure, income and value
added approach.
The product method uses the market prices of final
goods and services produced in a country during a year.
The data of all productive activities such as agricultural
product, manufactured product, the contribution of
transportation, communication doctors, teachers etc.
The expenditure approach takes into consideration
aggregate consumption expenditure, net domestic
investment, government expenditure on goods and
services and net foreign investments. Here it is believed
that national income is equal to national expenditure.
iii.Discuss the traditional and modern definitions of National
income
explaining
their
differences
and
interrelationship.
The traditional definition: are definition advanced by
marshal, pigou and fisher. To marshal, the labour and
capital of a country annually produced certain net
aggregate of commodities, material and immaterial
things. Pigou a devoted of marshallian thinking, included
the use of money as a measure of national income while
Fisher completely deviated from the marshallian. He
however uses “consumption” as the criterion of national
income as opposed to marshallian and pigouvian use of
production as a measure of national income.
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The modern definitions: from the modern point of view,
Simon kuznet defined national income as the “net output
of commodities and services flowing during the year
from the country’s productive system in the hand of
ultimate consumers” the united nations, in one of its
reports, defined national income on the basis of the
system of estimating national income as the net national
product to the shares of different factors, as the net
national expenditure in a country in a year’s time.
The definitions advanced by marshal, pigou, Fisher and
kuznet should be considered to be adequate and
interrelated at least for theoretical purposes. This is so
because all are considered to give the same result of
income when estimated.
iv.Point out the difference between the following concept of
national income.
i.
Gross National Product is the total measure of the flow
of goods and services at market value resulting from
current production during a year in a country while net
national product is gross national product less an
amount equal to depreciation.
ii.
Disposable income means the actual income which can
be spent on consumption by individual and families
while personal income is the total income received by
individuals of a country from all sources.
iii. Net National Product is the total amount of goods
produced by all the citizen of a country. It includes
income from abroad of its citizen. Gross domestic
product is the total amount of goods and services
domestically produced in a country over a period of
time.
v.Equilibrium National income.
a.
Y = C+I
where I = 100, C = 55 + 0.6y
Y = 55 + 0.6y + 100
Collect like terms
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Y – 0.6y = 55 + 100
Y(1-0.6) = 55 + 100
0.4y = 155
Divide both sides by 0.4
0.4y = 155
0.4y = 0.4
Yes = 77 5/2
Yes = N387.5
c.
consumption level
C = 55 + 0.6y
= 55 + 0.6 (387.5)
= 55 + 232.5
= 287.5
d.
marginal propensity to consume
MPC = DC
DY
Where C = 55 + 0.6y
DC = D (55+0.6y)
DY
DY
DC = 0.6
DY
MPC = 0.6
e.
CI
Graphical presentation.
Y=E
Y=C+I
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3
.
Y=C
100
I
TOPIC 4
i. Distinguish between economic growth and
economic development.
Economic growth can mean two things. It can be referred
to growth in national output as measured by the Gross
Domestic Product (GDP) and it can be referred to growth in
individual standard of living as measured Gross National
Product per capita. While development on the other means
or may be defined as depict growth and structural
growth/changes. An economy may be growing but without
structural changes in not developing. This is because
development is achieved when there is economic growth
and structural changes.
ii. There are three cores values of development.
These are:4
Life sustenance: ability to meet basic needs.
ii.
Self esteem: To be a person
Freedom from servitude: To be able to choose or free from
external control.
TOPIC 5
Q 1. What is fiscal policy? Distinguish clearly between the three
main types of discretionary fiscal policy.
Fiscal policy refers to that part of government policy
concerning the raising of revenue through taxation and
other means and deciding on the level and pattern of
expenditure for the purpose of influencing economic
activities or attaining some desirable macroeconomic goals.
Fiscal policy can therefore be used for allocation,
stabilization and distribution of resources in an economy.
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Fiscal policy is implemented through budget. A budget
is a financial statement of the sources of income (revenue)
and its uses (expenditure) of the government. We have
three types of budget:
i. Balanced budget
j. Deficit budget and
k. Surplus budget.
Q 2. Outline and discuss the objectives of fiscal policy in a
developing economy like Nigeria.
Fiscal policy refers to that part of government policy
concerning the raising of revenue through taxation and
other means and deciding on the level and pattern of
expenditure for the purpose of influence economic
activities. The objectives of fiscal policy include the
followings:i.
To increase employment opportunities
ii.
To promote economic stability
iii. To control inflation
iv.
To increase the rate of investment
v.
To ensure growth of national income
vi. To improve equilibrium balance of payment etc.
i.
To increase employment opportunities:- Fiscal policy
aims at increasing employment opportunities and
reducing unemployment and under employment.
l. To promote economic stability:- Fiscal policy promotes the
maintenance of reasonable economic stability in the face of
short run international instability.
m. To control inflation:- Fiscal policy aims at counteracting
inflationary tendencies inherent in an economy.
n. To increase rate of investment:- Fiscal policy aims at the
promotion and acceleration of the rate of investment in
theprivate and public sector.
o. To ensure growth of national income:- Fiscal policy aims at
promoting or increasing the national income of an
economy.
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Q 3. Discuss fiscal policy as a device for controlling the level of
economic activity.
Fiscal policy refers to the part of government policy
concerning the raising of revenue through taxation and
other means and deciding on the level and pattern of
expenditure for the purpose of influencing economic
activities.
It is a device use in controlling the level of economic
activities. Fiscal policy can therefore be use for the
allocation, stabilization and distribution of resources in an
economy through;
ii. Reducing or increasing taxes
iii. Increasing or decreasing government component of
aggregate demand.
iv. Subsidizing firms or removing subsidies.
TOPIC 6
Q 1. What is a commercial bank? Discuss the various functions
performed by a commercial bank.
Commercial bank is an institution which deals in
money. Broadly speaking, commercial bank draws surplus
money from the people who are not using it at the same
time lend it those who are in position to use it for
productive purposes. Commercial banks chiefly engaged in
financing international trade, and also carry on other
ordinary banking business of receiving deposits, advancing
loans and discounting bills.
The commercial banks perform the following function:i.
Commercial bank create credit
ii.
Act as agent
iii. Finances foreign trade
iv.
Accept deposit
i.
Gives loans and advances etc.
Q 2. Discuss the role of commercial banking in promoting
economic development.
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Commercial bank is an institution which deals in
money. Commercial bank however perform the following
role in promoting economic development.
i.
Financing Agriculture
ii.
Financing foreign trade
iii. Financing industrial growth
iv.
Management of foreign reserves
v.
Reduction of unemployment
vi. Helps in monetary policy
vii. Financing of various sectors of the economy.
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Q 3. Define money What is its social significance.
Money is a device that is generally acceptable as a
medium of exchange. In other words, anything that
performs the functions of money is money.
In a wider sense, the term money includes all media
of exchange. Different commodities such as gold, silver,
coins and later paper have been used as money.
The following are the function of money.
v. A medium of exchange
vi. As a store of value
vii. A unit of account
viii.
A measure of value
ix. A standard of payment etc.
Q 4. Discuss the role of money.
Money is any commodities that facilitates exchange of
goods and services. It is a commodity that overcomes the
disadvantage of barter. Its role is however significance.
The following are the role of money.
x. A medium of exchange
xi. A unit of account
xii. As a stock of value
xiii.
A measure of value
xiv.
A standard of payment etc.
TOPIC 7
Q1
What do you understand by international trade? Why do
country engage in trade.
International trade is the exchange of goods and
services between two or more countries so as to create a
smooth relationship between countries involved. However,
International trade is more of international relation than
international trade itself.
Countries engage in international trade because each
countries of the world are not blessed with all the factor
endowment (resources) to produce all countries needed by
such country. As a result of this countries of the world have
to engage in international trade. In other words, countries
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engage in international trade in order to gain from such
trade.
Q 2. Discuss briefly the theories of
a.
Absolute Advantage
b.
Comparative Advantage
a.
absolute advantage:- theory is propounded by Adam
Smith. He stressed that country could gain by trading if it
concentrates in the production of commodities in which it
has absolute cost advantage compared to their countries or
where its efficiency lies. Then nations can gain from trade
by specializing in the commodities in which they have
absolute cost advantage. For example, If Nigeria happens to
be efficient in the production of wheat and England is
efficient in the production of cloths, it shows that Nigeria
has absolute cost advange in the production of cloth than
wheat.
b.
Comparative Advantage:This law was first
formulated b Greek economist David Richards.
According to him, if one nation is less efficient than
the other in the production of both commodities or
in all lines of production. There is still basis for
mutual trade to take place between the two
countries. The country that has an absolute least
advantage should specialize in that line of
production and import the commodity in which it
absolute disadvantage is greater. This theory shows
that trade and specialization work to raise
productivity. For example in the table below.
Commodities
Nigeria
England
Wheat A
100
5
Cloth B
60
10
The table above shows that Nigeria has absolute
advantage in the production of both commodities. Though,
this absolute cost advantage in both lines of production
heed for trade between Nigeria and England because the
margin of advantage differs in the two commodities.
Nigeria can produce (20) times as much wheat than
England using the same quantity of resources but only six
as much wheat than England. Nigeria is said to have a
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comparative disadvantage in the production of cloth and a
comparative advantage in the production of wheat.
TUTOR MARK ASSIGNMENT
1.
a)
b)
2.
Explain the concept of the circular flow of income in a tree
sector
model.
3.
Write short notes on the followings:i. Gross Domestic Product (GDP)
ii. Gross National Product (GNP)
iii.
Net National Product (NNP)
iv. Per Capita Income
4
a.
b.
Distinguish between growth and development.
List and discuss four (4) Impediments to economic
development in Nigeria.
5
a.
b
What is fiscal policy?
List and discuss four (4) objectives of fiscal policy in
Nigeria.
List and explain five (5) functions of a commercial
c.
bank.
Distinguish between micro and macro economics.
Describe the scope of micro and macro economics
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