Question

Section B - 1 Consider that you are living in a "SIMPLE ECONOMY" in which the following goods are produced: Chicken, Machine, Rice, and Iron. Let's assume that in 2019, the Chicken was sold for Price 2, and the quantity purchased is 20 units. Machines were purchased for Price 15 and Quantity is 40 units. Rice was sold for Price 28 and Quantity purchased is 20 units. Iron is purchased at the price of 12 and 19 units have taken. In the 2020 year Quantities for these items are the same but the price is like for the Chicken Price is 3, for the Machine Price is 18, for the Rice price is 35 and for the Iron price is 18. All the prices are in OMR and Quantities are in Units. Questions: 1) Read and identify, what is happening to the overall "PRICE LEVEL" and name and explain the phenomenon/ concept in your own words. (2 Marks)

Answer 1

1. The "Price Level" is rising due to the phenomenon called Inflation. Inflation is the general increase in the prices of goods and services in an economy over a period of time. When the price level of currency increases, each unit of currency is able to but fewer goods and services compared to before.

2. To calculate the national income we need to multiply the quantity with the price of each year

2019 prices being the constant price and 2020 being the current price

Chicken's price was 2 in 2019 and 3 in 2020. Quantity being 20 for both years.

= 2 * 20 for 2019 and 3 * 20 for 2020

= 40 and 60

Machine's price was 15 in 2019 and 18 in 2020. Quantity being 40 for both years.

= 15 * 40 for 2019 and 18 * 40 for 2020

= 600 and 720

Rice's price was 28 in 2019 and 35 in 2020. Quantity being 20 for both years.

= 28 * 20 for 2019 and 35 * 20 for 2020

= 560 and 700

Iron's price was 12 in 2019 and 18 in 2020. Quantity being 20 for both years.

= 19 * 12 for 2019 and 19 * 18 for 2020

= 228 and 342

Total income for 2019 is 40 + 600 + 560 + 228 = 3449 (Constant Price)

Total income for 2020 is 60 + 720 + 700 + 342 = 3844 (Current Price)

	Price	National Income
Product	Quantity	2019	2020	2019	2020
Chicken	20	2	3	40	60
Machine	40	15	18	600	720
Rice	20	28	35	560	700
Irons	19	12	18	228	342
Total				3449	3844

3. There is a change in National income at the current price and at a constant price. National Income at a constant price is 3449 and at the current price is 3844. The National income increased by 395 which is an 11% increase.

But this increase is not real since the output quantity is the same, there is no real increase in national income.

When Income is calculated on constant price, it is called Real GDP and when it is calculated at current price, it is called nominal GDP.