Short notes suggestion and answer for Banking Diploma Examination

Subject Wise Study Resources for Banking Diploma Examination - JAIBB

Paper 1: Principles of Economics and Bangladesh Economy

Short Notes on Principles of Economics and Bangladesh Economy for Banking Diploma Examination - JAIBB

Q1.      Definition of Consumer surplus or Consumer’s surplus: Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay. If a consumer would be willing to pay more than the current asking price, then they are getting more benefit from the purchased product than they initially paid. Consumers always like to feel like they are getting a good deal on the goods and services they buy and consumer surplus is simply an economic measure of this satisfaction.

In economics, the satisfaction (utility) consumers receive for which they do not have to pay for. Or, in other words, amount of money by which consumers value a good or service over and above its purchase price.

Example of Consumer’s surplus: Assume a consumer goes out shopping for a CD player and he or she is willing to spend $250. When this individual finds that the player is on sale for $150, economists would say that this person has a consumer surplus of $100.

Q2.      Cash Reserve Ratio or CRR: CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the Central Bank. This serves as a measure to control inflationary forces in economy. Present rate of CRR is 6.5%.

The cash reserve ratio or CRR is a central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves. These required reserves are normally in the form of cash stored physically in a bank vault or deposits made with a central bank.

Example of CRR: For example, if the reserve ratio in the Bangladesh is determined by the Fed to be 6.5%, this means all banks must have 6.5% of their depositors' money on reserve in the bank. So, if a bank has deposits of Tk. 1 billion, it is required to have Tk. 6.5 million on reserve.

Q3.      Index Number: Definition, example and Difficulties of Index Number.

Index numbers are a simple way of making it easier to compare numbers over a period of time. Index numbers measure relative changes in the price of a sum of representative data.

An index number is an economic data figure reflecting price or quantity compared with a standard or base value. The base usually equals 100 and the index number is usually expressed as 100 times the ratio to the base value. Index numbers are used especially to compare business activity, the cost of living, and employment. They enable economists to reduce unwieldy business data into easily understood terms.

For example, if a commodity costs twice as much in 1990 as it did in 1980, its index number would be 200 relative to 1980.

Difficulties in Using Index Numbers:

The most commonly used index number is the Consumer price index. However, this also presents a problem when trying to use an index to measure changes in the cost of living.

One basic difficulty is that the goods bought are constantly changing. Therefore, measuring changes in price is not an accurate reflection of what is happening because the quality of goods may be changing.

Q4.      Cross-Price Elasticity of Demand: Definition, example and formula of Cross-Price Elasticity of Demand.

In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good.

If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases. Similarly if the two goods are complements, we should see a price rise in one good cause the demand for both goods to fall.

For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: \frac{-20 \%}{10 \%}=-2.

The formula used to calculate the coefficient cross elasticity of demand is 

Figure: Formula of Cross-Price Elasticity of Demand