SBOTS Economics Syllabus

State the profit-maximizing output rule for any firm.

A firm maximizes profit where Marginal Revenue equals Marginal Cost (MR = MC), with MC rising through that point.

Define Gross Domestic Product (GDP).

The total market value of all final goods and services produced within a country's borders during a given time period, regardless of producer nationality.

Distinguish GDP from GNP (Gross National Product).

GDP measures output produced within a country's geographic borders; GNP measures output by a country's nationals/residents (GDP plus net factor income from abroad).

What is the expenditure method formula for GDP?

GDP = C + I + G + (X − M), where C = consumption, I = investment, G = government spending, X = exports, M = imports.

Distinguish nominal GDP from real GDP.

Nominal GDP is measured at current market prices; real GDP is measured at constant (base-year) prices, removing the effect of price changes (inflation) to show true changes in output.

What is the GDP deflator and its formula?

A price index measuring overall price level: GDP deflator = (Nominal GDP / Real GDP) × 100. It reflects price changes across all goods in GDP.

Define inflation and name its main types by cause.

Inflation is a sustained rise in the general price level (fall in money's purchasing power). Main types: demand-pull (excess aggregate demand) and cost-push (rising production costs).

How is the inflation rate calculated using a price index (CPI)?

Inflation rate = [(CPI in current year − CPI in previous year) / CPI in previous year] × 100.

Define the unemployment rate and its formula.

Unemployment rate = (Number of unemployed / Labour force) × 100, where labour force = employed + unemployed actively seeking work.

Name and define the main types of unemployment.

Frictional (between jobs/search), structural (skills-jobs mismatch), cyclical (from recession/low demand), and seasonal (time-of-year variation).

What does the Phillips Curve illustrate?

An inverse short-run relationship between inflation and unemployment — lower unemployment tends to be associated with higher inflation, and vice versa.

What does the Aggregate Demand (AD) curve show and why is it downward sloping?

AD shows total planned spending (C+I+G+NX) at each price level. It slopes downward due to the wealth (real balance) effect, the interest-rate effect, and the net-export effect.

Why is the short-run Aggregate Supply (SRAS) curve upward sloping but long-run AS vertical?

In the short run, sticky wages/prices mean higher prices raise profits and output. In the long run, output is fixed at potential (full-employment) level determined by resources and technology, so LRAS is vertical.

What are the four phases of the business cycle?

Expansion (boom/recovery), peak, contraction (recession), and trough — recurring fluctuations in real GDP around its long-run trend.

Define a recession in terms of GDP.

A significant decline in economic activity, commonly defined as two consecutive quarters of falling real GDP, accompanied by rising unemployment.

List the four functions of money.

Medium of exchange, unit of account (measure of value), store of value, and standard of deferred payment.

Describe the evolution of money in stages.

Barter → commodity money (e.g., goods, metals) → metallic/coin money → paper money (representative then fiat) → bank/credit money → electronic/digital money.

What is fiat money?

Money that has value because the government declares it legal tender, not because it is backed by a commodity like gold; its value rests on public confidence.

What is the 'double coincidence of wants' problem?

A limitation of barter: exchange requires each party to want exactly what the other offers. Money solves this by acting as a universal medium of exchange.

Explain credit creation by commercial banks.

Banks keep a fraction of deposits as reserves and lend out the rest; loaned money is re-deposited and re-lent, multiplying the original deposit into a larger total money supply (fractional reserve banking).

Give the formula for the money (credit) multiplier and total deposit creation.

Money multiplier = 1 / reserve ratio (r). Total credit created = Initial deposit × (1/r). E.g., with r = 20%, an initial deposit creates 5× total deposits.

State the Fisher equation of exchange (Quantity Theory of Money).

MV = PT (or MV = PY), where M = money supply, V = velocity of money, P = price level, T/Y = volume of transactions/real output.

What does the Quantity Theory of Money conclude about money supply and prices?

Assuming V and T are stable, the price level (P) is directly proportional to the money supply (M); an increase in money supply causes a proportional rise in prices.

Distinguish direct taxes from indirect taxes.

Direct taxes are levied on income/wealth and paid directly by the person (e.g., income tax, corporate tax). Indirect taxes are levied on goods/services and can be shifted to consumers (e.g., sales tax, GST, excise, customs).

Distinguish progressive, regressive and proportional taxes.

Progressive: tax rate rises as income rises. Regressive: rate falls as income rises (takes larger share from the poor). Proportional: a constant flat rate regardless of income.

Differentiate capital expenditure from current (revenue) expenditure of government.

Capital expenditure creates assets or reduces liabilities (e.g., infrastructure, machinery). Current/revenue expenditure covers day-to-day running costs (e.g., salaries, subsidies, interest payments) and creates no asset.

What is a budget (fiscal) deficit and how is it usually financed?

A budget deficit occurs when government expenditure exceeds revenue in a period. It is financed by borrowing — domestic borrowing (from public/banks) and external borrowing — adding to public debt.

Define public debt and distinguish internal from external debt.

Public debt is total government borrowing outstanding. Internal debt is owed to lenders within the country (in local currency); external debt is owed to foreign lenders/institutions (often in foreign currency).

What is fiscal policy and what are its main tools?

Fiscal policy is the use of government spending and taxation to influence the economy. Its tools are government expenditure and taxation (and the resulting deficit/surplus); expansionary fiscal policy raises spending/cuts taxes, contractionary does the reverse.

What are the components/accounts of the Balance of Payments (BoP)?

The current account (trade in goods and services, primary income, secondary income/transfers), the capital account, and the financial account; the BoP as a whole always balances (sums to zero with reserves/errors).

Distinguish the balance of trade from the current account.

Balance of trade is exports minus imports of goods (and sometimes services). The current account is broader, also including net income from abroad and net transfers such as remittances.

Compare fixed and flexible (floating) exchange rate systems.

Fixed: the rate is pegged by the central bank, which intervenes to maintain it (stability but needs reserves). Flexible/floating: the rate is determined by market supply and demand for the currency (auto-adjusting but volatile).

Define currency depreciation and appreciation under a floating system.

Depreciation is a fall in a currency's value against others (makes exports cheaper, imports dearer). Appreciation is a rise in its value (makes exports dearer, imports cheaper).

State the theory of comparative advantage.

A country should specialize in and export goods it can produce at a lower opportunity cost than others, and import the rest; mutual specialization and trade raise total output and benefit all parties (Ricardo).

Distinguish absolute advantage from comparative advantage.

Absolute advantage: producing a good using fewer resources than another country. Comparative advantage: producing a good at a lower opportunity cost. Trade gains arise from comparative, not absolute, advantage.

What is a tariff and what are its main effects?

A tariff is a tax on imported goods. It raises import prices, protects domestic producers, reduces import volume, and generates government revenue, but raises prices for consumers and can reduce overall efficiency.

Distinguish a tariff from a quota.

A tariff is a tax raising the price of imports (and earns government revenue). A quota is a quantitative limit on the amount of a good that may be imported, restricting supply without directly earning tariff revenue.

What are workers' remittances and why are they important for Pakistan?

Remittances are funds sent home by nationals working abroad. They are a major source of foreign exchange, support the current account, finance imports, and supplement household incomes and national savings.

What are foreign exchange reserves and why does a central bank hold them?

Foreign reserves are foreign currencies, gold and assets (e.g., SDRs) held by the central bank. They are used to settle international payments, support/defend the exchange rate, and provide an import cover buffer.