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DEPERTMENT OF ECONOMICS

UNIVERSITY OF KARACHI
ASSIGNMENT # 1 (MACRO-ECONOMICS)
B.S (2ND Year)
DR. KHALID MUSTAFA

Answer the following questions:

1. Suppose police become more efficient and we hire fewer police officers. What
will happen to GDP?
2. Assume a product improves in quality from one year to the net year and its
price rises to reflect this improvement. What happens to the GDP deflator and
real GDP?
3. Do increases in unwanted inventories on firm’s shelves count as inventory
investment in GDP account?
4. Is buying an air-conditioner an act of consumption or investment in the GDP
accounts? What about purchase of a house?
5. What happens to a GDP account when a Pakistani firm decides to build a plant
in Dubai rather than in Pakistan?
6. How would an increase in a sales tax affect GDP?
7. If your friend urges you to purchase stock options, is he encouraging you to
invest in the sense in which we use the term in the GDP account?
8. Is domestic investment the same as investment done in Pakistan?
9. What is difference in the National Income accounts if a firm purchases a car
for an executive and the firm pays the executive an additional income to
purchase a car?
Ans.
10. State bank of Pakistan has taken expansionary monetary policy by declining
interest rate from 13% to 12.5%. Show the effect of this policy on GDP,
Employment, inflation and foreign sector.
11. Explain why intermediate goods and services generally are not included
directly in GDP are there any circumstances under which they would be
included directly?
A. They are not produced
B. They do not have a market value

C. They are imported and not produced locally

D. To do so would result in their market value being included more than


once
B.
12. Suppose that a woman marries her servant. After they are married, her
husband continues to wait in her as before. And she continues to support him
as before (but as a husband rather than as a wage earner). How do you think
the marriage affects GDP? How would it affect GDP?
13. Suppose that virtually every one In Pakistan decides to take life a little, and
the length of the average work increases by 25%. How will it affect GDP?
14. What are goods and services counted in GDP at market price. Is there any
disadvantage in using market price to measure productions?
15. Assume an economy produced only two goods, computer and television sets in
2008 and 2009. It produces 100 computers in 2008 at a price of $1000 and 200
computers in 2009 at a price of $500. It produces 1000 television sets in 2008
at a price of $500and 800 television sets in 2009 at a price of $600. Compare
nominal GDP, Real GDP, GDP deflator, CPI and Inflation.

16. Given the following information:

GDP = Rs.2400 National Income = Rs.1925


IG (gross Investment) = Rs.400 Wages & salaries = Rs.1460
IN (Net Investment) = Rs.150 Dividends = Rs.50
Consumption = Rs.1500 Net Interest = Rs.60
Government purchase of goods and services = Rs.480
Government budget surplus = Rs.15
Proprietors income plus rental income = Rs.160
Personal interest income = Rs.190
Social insurance contributions = Rs.190
Personal tax and non-tax payments = Rs.300
Government and business transfer to person = Rs.260
Interest paid by the consumer & transfer to foreigners = Rs.45

Calculate:

i. Depreciation
ii. Net export
iii. Indirect taxes
iv. Corporate profit
v. Personal income
vi. Government taxes-transfer payments
vii. Disposable income
viii. Personal saving

vii. Disposable income = GDP – Tax + Gov transfer fees


vii. 2400 – 300 + 260=Rs.2360

viii. Personal Saving = Disposable income – Consumption


viii. 2360 – 1500 =Rs. 860

Ques1. Suppose police become more efficient and we hire fewer police
officers. What will happen to GDP ?

Ans.GDP will decrease because, GDP is considered with the Quantity not with the
Quality. Therefore Less service provided, cause less output, so GDP goes down.

Ques2. Assume a product improves in quality from one year to the net year and
its price rises to reflect this improvement. What happens to the GDP deflator
and real GDP?

Ques3. Do increases in unwanted inventories on firm’s shelves count as


inventory investment in GDP account?

Ques4. Is buying an air-condition (A/C) an act of consumption or investment in the


GDP accounts ? What about purchase of a house ?

Ans. Buying an Air Conditioner for a house I which a person wants to live will be a
consumption, but for a firm or for any any commercial purpose it will be the
investment in GDP’s account.

Ques5. What happens to GDP accounts if an American firm decides to build a plant in
England rather than the U.S. ?

Ans. If an American firm decides to build a plant in England, then the GDP of
England will increase (depends on material and services they are getting from). And
for Americans it will be there GNP increase.
Ques6. How would an increase in a sales tax affect GDP?

Ques7. If your friend urges you to purchase stock options, is he encouraging


you to invest in the sense in which we use the term in the GDP account?

Ques8. Is domestic investment the same as investment done in any other


country ?

Ans. No, Domestic Investment is different rather than investment in other country.

Consumption (C) 300


Investment (I) 50
Government purchases (G) 70
Government transfer payments (TP) 15
Taxes (T) 75
Exports (X) 10
Imports (M) 5

To find Disposable Income (DI) you first need to find your GDP (Y).
Y= C + I + G + (X-M)
Y = 300 + 50+ 5 + 70
Y=425

So the formula for DI ( Gross Income - Taxes + Transfer Payments) is


DI = Y - T + TP
DI = 425 - 75 + 15
DI = 365

From that you can find savings (Whatever is not consumed is saved)
S= DI - C
S = 365 - 300
S = 65

1. Suppose police become more efficient and we hire fewer police officers. What will
happen to GDP ?

GDP goes down. Less service provided, less output, lower GDP.
Ans.GDP will decrease because, GDP is considered with the Quantity not with the
Quality. Therefore Less service provided, cause less output, so GDP goes down.

2. Assume a product improves in quality from one year to the next year and its price
rises to reflect this improvement. What happens to the GDP deflator and Real GDP ?

Quality isn't measured in the GDP. Only price and quantity. If price goes up for
the same quantity, GDP goes up. But real GDP is measured by a base price. The
base price doesn't change so real GDP remains the same. That means the GDP
deflater goes whatever way it's gotta go so Nominal GDP is higher than Real GDP in
the later year. Sorry, to lazy to look it up.

3. Do increases in unwanted inventories on firm's shelves count as inventory


investment in GDP account ?

My text says yes. Additions to finished good inventories are included as


investments. That makes sense because we're trying to measure this years output.
And they didn't get into sales.

The question is,what do we do with inventory from last year that got sold this year.
Can't count it twice so it must be subtracted from the years sales or just not included
in the sales.

4. Is buying an air-condition (A/C) an act of consumption or investment in the GDP


accounts ? What about purchase of a house ?

I'm going this way, buying an air conditioner for a plant is an investment. Buying a
newly build house is an investment for GDP. So,what about buying an air conditioner
for an old house? I'm going with a consumer purchase but that's just a guess.

Ans. Buying an Air Conditioner for a house I which a person wants to live will be a
consumption, but for a firm or for any any commercial purpose it will be the
investment in GDP’s account.

Purchasing a house

5. What happens to GDP accounts if an American firm decides to build a plant in


England rather than the U.S. ?

Depends on who they purchase the materials from. I would have to say that it isn't
included in US GDP. It only makes sense as GDP is intended to measure the nations
productivity. The plant build in England would be build by labor and materials in
England. If the materials were being purchase in the US and shipped to England, they
would be exports.

Ans. If an American firm decides to build a plant in England, then the GDP of
England will increase (depends on material and services they are getting from). And
for Americans it will be there GNP increase.

6. How would an increase in a sales tax affect GDP ?

I don't think sales taxes are included in the price of the goods for GDP
calculations. No effect then.

7. If your friend urges you to purchase stock options, is he encouraging you to invest
in the sense in which we use the term in the GDP account ?

No, investment in GDP terms is not the same as investment in business terms. In
GDP terms, it is the purchase of buildings and equipment used to produce the product
but not actually part of the final product.

8. Is domestic investment the same as investment done in any other country ?

Again, I have to go back to the fundamental purpose of what GDP measures. It


measures the value added by the national economy in the production of final goods
and services. An economic investment in plant and equipment in a foreign country
wouldn't be value added by the national economy. So it would not be the same.

Ans. No, Domestic Investment is different rather than investment in other country,
because

9. What is difference in the national income accounts between

• A firm's purchasing a car for an executive and the firm's paying the executive
additional income to purchase a car ?

A firm purchasing a car for an executive would be a GDP investment in


equipment. AN increase in salary for a bonus or for the executive to buy a car would
not be included in GDP. When the executive buys the car, then the sale would be
included in GDP under consumption.
• You're hiring your spouse ( who takes care of the house ) rather than just
having her do the work

That is, in fact, one of the points of what GDP fails to measure.

But I run into a problem. So I have to think this out.

Does labor expenses by a company get included in GDP? Is it simply


included in the price of the final product and therefore measured by including the final
product sales. The answer to this is yes.

If I higher any one to clean my house, is that included as consumption in


GDP? My text says that getting my hair cut is included in GDP.

If my wife has a business, even with only me as her customer, paying taxes on
the income for cleaning our house, then yes her services would be included in GDP.

Of course, the reason that I explained my answers is that you should check them.

Technically, if she doesn't have a business, but I pay her, then no. If my kid is
paid "under the table, an allowance for mowing the lawn, no. These would be more
like transfer payments.

So, the answer really depends on if taxes are paid on the income done for the
work that is a final service.

So, it kind of depends on what the author means by "hiring". I have to conclude
that to "higher" someone means they are reporting income and paying taxes. I have to
go with yes, it is included in GDP.

This is why I dislike bubble exams. I like to make sure I am allowed to explain
my reasoning.

If this was an exam, I'd be crossing my fingers a bit on the last one. But then, I
got an A+ in my macro economics course so I'm willing to bet $1 that I got it right. If
I got it wrong, I'd sure like to know what the author was thinking.

NI = GDP + NR - IBT - CC
NI = National income
NR = + or - Net income from assets abroad (net income receipts)
IBT = Indirect business taxes
CC = Depreciation

NI = 4'000 + 0 - 210 - 500 = 3'290

NDP = GDP - CC
NDP = Net domestic product
NDP = 4'000 - 500 = 3'500

PI = NI - corporate taxes - retained earnings - social security + transfer payments +


net interest
PI = Personal income

PI = 3'290 - 50 - 25 - 200 + 500 = 3'515

DI = PI - Personal taxes
DI = Disposable income

DI = 3'515 - 250 = 3'265

Y=GDP- $6,000
I=Gross Investment- $800
Net Investment- $200
C=Consumption- $4,000
Nx=Government purchases of goods and services- $1,100
Government Budget Surplus- $30

How do I calculate NDP?


How do I calculate Net Exports?
How do I calculate Government Taxes minus transfers?

Y=C+I+G+NX

NX = Y-C-I-G = 6'000-4'000 -800-1'100 = +100

NDP = GDP-CC

CC = Ig-In = 800-200 = 400

NDP = 6'000-400 = 5'600

Sg = T-G-TP
30 = T-1'100-TP

T-TP = 30+1'100 = 1'130

Answ:
NDP = 5'600
NX = +100
T-TP = 1'130
How to calculate Personal Income,
Disposable Income, National Income, and
Net Domestic Product?
GDP 4000
Transfer Payments 500
Corporate Inc. Taxes 50
Social Sec. Contributions 200
Indirect business Taxes 210
Personal Taxes 250
Undistributed Corp. Profit 25
Depreciation 500
Net Income Earned Abroad 0

Best Answer - Chosen by Voters


NI = GDP + NR - IBT - CC
NI = National income
NR = + or - Net income from assets abroad (net income receipts)
IBT = Indirect business taxes
CC = Depreciation

NI = 4'000 + 0 - 210 - 500 = 3'290

NDP = GDP - CC
NDP = Net domestic product

NDP = 4'000 - 500 = 3'500

PI = NI - corporate taxes - retained earnings - social security + transfer payments +


net interest
PI = Personal income

PI = 3'290 - 50 - 25 - 200 + 500 = 3'515

DI = PI - Personal taxes
DI = Disposable income

DI = 3'515 - 250 = 3'265


How can we calculate GNP, NNP, National
Income, Personal Income and Personal
Disposable income?
How can we calculate GNP, NNP, National Income, Personal Income and Personal
Disposable income with following data?

GDP = 5677.5
Net Factor payment from abroad = 17.5
Capital consumption allowance = 626.1
Indirect taxes = 475.2
Social security contribution = 528.8
Govt. and business transfers to person = 771.1
Dividends = 137
Personal Tax & Non-Tax payment = 618.7

GNP = 5677.5 + 17.5

NNP = GNP – Depreciation


NNP = 5677.5 + 17.5 – 626.1

National Income = NNP – In Direct Taxes + Subsidies


National Income = 5677.5 + 17.5 – 626.1 – 475.2

PI = NI + Transfer of Payments – Profit Taxes – Undistributed profit


PI = 5677.5 + 17.5 – 626.1 – 475.2 + 528.8 + 771.1 + 137

DPI = PI – Personal Taxes


DPI = 5677.5 + 17.5 – 626.1 – 475.2 + 528.8 + 771.1 + 137 – 618.7

Now calculate yourself and you will find the answer.

How to calculate GDP, national income,


disposable personal income, and personal
savings?
consumption=1000
government transfer payments=100
indirect business taxes=20
gross private domestic investment=150
exports=200
government consumption and gross investment=240
corporate profits=25
dividends=5
social insurance taxes=60
personal income taxes=150
imports=260
personal transfers to foreigners=25
net factor payments from abroad= - 30 (yes, negative)
interest earned from government and consumers=12
interest payments to business=5

Seems like "depreciation" is missed from list (it should be =10 for your task).

GDP - Gross Domestic Product


NI - National Income
PI - Personal income
DI - Disposable income
PS - Personal savings
C - Consumption = 1000
I - Gross investment = 150
G - Government spending = 240
Ex - Export = 200
Im - Import = 260
CC - Depreciation = 10
TP - Transfer payments = 100
IBT - Indirect business taxes = 20
NFI - Net factor income = -30
PT - Personal taxes = 150
RE - Retained earnings

GDP=C+I+G+Ex-Im = 1000+150+240+200-260=1330
NI=GDP-IBT-CC+NFI= 1330-20-10-30=1270 Indirect bussines Tax
PI=NI+RE-SS+TP+NetInterest= 1270+12-60+100+(5-25)=1302
DI=PI-PT=1302 -150=1152
PS=DI-C-BusinessInterest - PersonalTranfersToForeigners=
=1152-1000-5-25=122