Question

(a) What is Gross National Product (GNP)? What is one weakness of using GNP as a measure of economic activity?

b) Using a well-labeled graph, illustrate the concept of a binding price ceiling OR a price floor (but NOT both).

Answer 1

Answer Gross National Product- GDP + Net factor income from abroad

It measures the market value of all final goods and services produced in a country with the domestic territory and outside the domestic territory for an accounting year.

Weakness of using GNP as measure of economic activity.

Gross national product is an imperfect measure of social welfare and it is not accurate measure of measuring economic growth. Improvement in productivity is arduous to calculate with the gross national product.

B) Price floor - It is the minimum price decided and set by the government. Which is above the market price? It is for the benefits of the agriculture firms. So that they can sale their farm products at price floor decided by the government. It increases the producer welfare.

Price ceiling - It is the maximum price decide by the government, below the market price. It is for the benefit of consumers and consumer surplus. No firm can charge high price from the consumers.

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