Question

Question 2

1. What are the determine determinants of consumption.
2. What are some of the limitations using Gross National Products as a measure of economic performance.
3. ‘Inflation is such a bad disease that any country would would wish to rid off’. Explain.

Answer 1

Answer 2)

(a) Determinants of consumption are as follows:

• Money Income: Income of the individual is the predominant factor in deciding his utilization. Salary, utilization and investment funds of an individual are related with one another.
• Real income: Keynes brings up that the consumption is affected by real income earned than by money income. An adjustment in the price level will change the estimation or value of money and the buying power. The fluctuations in the price level will influence real salary and furthermore the propensity to consume. A rise in the price level will lessen the real income thus there will be a fall in the propensity to consume.
• Expections of future changes: In the event that the individuals in the economy expect unexpected changes later on with respect to their income, bumper harvest or deficiency of products or price level, then as a result the consumption function of the individuals will change.

  During war, scarcity or shortage of commodities will be normal and the individuals will hurry to purchase far in overabundance of their needs. On the off chance that they foresee bumper harvest or monstrous import which would diminish the price sooner, then the consumption would be deferred to a future date and henceforth, the propensity to consume will be low.

• Rate of interest: Perspectives contrast with respect to the role played by the interest rate in the consumption function. The traditional view is that if the interest rate goes up, individuals will spend or consume less and spare more to take the benefit of the higher interest rate. At the point, when the rate of interest falls, then as a result they will consume more and save less. There is an inverse relationship between the consumption and interest rate.

(b) GNP measures the market estimation of final commodities and services, it can just mirror the measure of cash that society trades for products. Accordingly, numerous significant exercises which influence our standard of living are rejected from the computation of GNP. For instance, we incorporate advantages got from the public sector in GNP however not the expenses of giving them.

Another instance is the social value of training however not the costs brought about to procure it. For a better measure of the economic activities, it should incorporate both positive as well as negative contributions towards the production. Be that as it may, most financial experts disagree with this methodology.

(c) A nation would not wish to have a inflation in their economy due to the following resons:

In the event that inflation in a particular nation, say, UK is higher than somewhere else, at that point UK products will get uncompetitive prompting a decrease in the demand for UK's amount of exports. Now, if there is a reduction in the demand for UK's products, at that point there might be a shortage or deficit on the current record Balance of Payments. Nonetheless, this might be counterbalanced by a devaluation that is probably going to happen from high level of inflation.

If the inflation is high in a particular country then there will be a downgrading of the exchange rate, this is something the government wishes to stay away from as it makes vulnerability among business and lower buying intensity abroad.

A higher level of inflation may cause menu costs, this means that the firms need to change price records regularly. Current innovation has likewise made it simpler for firms to change price level.