INTI INTERNATIONAL COLLEGE PENANG UNIVERSITY OF WOLLONGONG ECON 101: MACROECONOMIC ESSENTIAL FOR BUSINESS Tutorial 2 (submit by 12 March

2012)

1. For each the following, explain the distinction between the two concepts used in nationals income accounting; a) Gross domestic product at factor cost and gross domestic product at market prices The concept of GDP at basic prices differs from the concept of GDP at factor costs in that the former includes net indirect taxes (indirect taxes less subsidies) attached to factors of production. For example, whereas property taxes, capital taxes and payroll taxes were not included in the valuation of GDP at factor costs, they are included in the valuation of GDP at basic prices. These production expenses are included in GDP at basic prices, subtracting from them any subsidies attached to factors of production, such as subsidies allocated for job creation and training. b) Gross domestic product at factor cost and gross national product at factor cost GDP: Total value of products & Services produced within the territorial boundary of a country.It is defined as an estimated value of the total worth of a countrys production and services, calculated over the course on one year GNP: Total value of Goods and Services produced by all nationals of a country (whether within or outside the country). GDP (+) total capital gains from overseas investment (-) income earned by foreign nationals domestically GNP at factor cost = GNP at market price indirect taxes + subsidies GDP at factor cost = GDP at market price indirect taxes + subsidies c) Gross national product at factor cost and national income. GNP at factor cost: GNP at factor cost refers to income which the factors of production receive in return for their service alone. GNP at FC = GNP at Market Price - Net Indirect Taxes + Subsidies National income: National income is a measure of the value of goods and goods produced by the residents of an economy in a given period of time, usually a quarter or a year.

d) Total domestic expenditure at market price and national income at constant prices. 1

Total domestic expenditure at market price: Sum of household final consumption expenditure, general government final consumption expenditure and gross capital formation. National income at constant prices: Constant price refers to the price ruling in the market in the base year. It is the price of a commodity in the base year. Thus constant price means the base price of commodity. When the value of goods and services produced during a given year is measured on the basis of prices of a particular past year and not on the basis of prices of the current year in which goods are produced, the estimation of national income is called national income at constant price. e) National income at current prices and national income at constant prices. National Income at Current Prices- When goods and services produced by normal residents of a country in a given year are estimated at current prices, it is called national income at current prices. Current prices refer to the prices prevailing during the year for which estimates are made. Thus it is estimation of goods and services produced during a year on the basis of the prices of the same year. For national income at current prices, we use same years output and same years market prices. Such data reflect the state of economic affairs of that year but does not show real change in national income because prices keep on changing. National Income at Constant Prices- When goods and services produce by normal residents of a country during a year are valued at fixed prices, i.e. prices of the base year, it is called national income at constant prices. Constant prices refer to the prices prevailing in the base year. Every country measures national income both at current prices and constant prices but it is the latter which indicates real change in national income.

2. Consider the following information about an economy; Population Employment : 25 million : 10 million

Unemployment : 1 million a) What is this economys labor force? Answer:11 million b) What is the unemployment rate? Answer : 1 million / 11 million =0.091 c) If 0.2 million of those unemployed are frictionally unemployed and 0.4 million are structurally unemployed, what is the natural rate of unemployment?

3. Table 1 gives data for an economy producing three final goods, pizza, beer and salad. Table 1 Current period Item Quantity Price ($) Expenditure ($) Pizza Beer Salad 10 units 20 bottles 20 serves 10 3 4 100 60 80 Base period Price ($) 9 2 5 Expenditure ($)

a) Complete the Table 1 by calculating expenditure on each good valued at base period price. b) What is the value of nominal GDP in the current period?

c) What is the value of real GDP in the current period?

d) What is the GDP deflator figure for the current period?

4. The following figures are taken from national account of Little Trivilvania for 1900. $ million Consumers expenditure Exports Imports Gross Investment Taxes on expenditure Subsidies Capital Consumption Government expenditure Income from abroad Income paid abroad 6684 2900 3479 2000 1400 340 1200 1845 250 70

i)

Calculate Gross Domestic Product at market price GDP = private consumption + gross investment + government spending + (exports imports), =1200+2000+1845+(2900-3479)=4476

ii)

Calculate Gross National Product at market price GNP = GDP + Net factor income from abroad =4476 +(250-70)=4656

iii)

Calculate Gross National Product at factor cost = GNP at market prices - Indirect Business Taxes + Subsidies =4656-1400+340=3596 4

iv)

Calculate National Income =GDP=4476

v)

Calculate Net Investment

5. (a) Does an increase in National Income mean an increase in living standards of a country?

The standard of living is a measure of the material welfare of the inhabitants of a country. The baseline measure of the standard of living is real national output per head of population or real GDP per capita. This is the value of national output divided by the resident population. Other things being equal, a sustained increase in real GDP increases a nations standard of living providing that output rises faster than the total population. However it must be remembered that real income per capita on its own is both an inaccurate and insufficient indicator of true living standards both within and between countries.

(b)What are the problems commonly encountered in the estimation of the National Income? There are some problems which crop up when measuring national income of a country, some are as below1 ) P r o b l e m s o f D e f i n i t i o n :

Ideally we should include all goods and services produced in the course of the year; but there are some parts of the total which defy measurement. The services of housewives, for example, are not included on the ground that there is no means of assessing their market value. 2 ) C a l c u l a t i o n o f D e p r e c i a t i o n: The question of calculation of depreciation on capital consumption presents another formidable difficulty. Unless from the gross national income correct deductions are made for depreciation, the estimate of n e t n a t i o n a l i n c o m e i s b o u n d t o g o w r o n g . T h e m a i n p r o b l e m i s t h a t b o t h t h e amount and the composition of capital are changing all the time. 3 ) V a l u e o f I n v e n t o r i e s : It is not easy to calculate the value of inventories,i . e . , r a w m a t e r i a l s , s e m i f i n i s h e d a n d f i n i s h e d g o o d s i n t h e c u s t o d y o f t h e producers.