AS Economics Cheat Sheet
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National Income Formula Sheet
1) Real GDP = Nominal GDP (or Money GDP / Money income) – inflation
2) GDP in nominal terms is the current monetary value, i.e., the total spending on goods and services or
the total value of output with no adjustment ae for the effect of inflation.
Real GDP measures the level of national income adjusted for inflation. Real GDP growth measures
the actual increase in the volume of goods and services produced by a country.
Nominal GDP
CPI
2010
$2.21 trillion
100
2011
$2.00 trillion
102
Real GDP = Nominal GDP ×
CPI (base year)
CPI (current year)
Converting nominal data into real data:
Real GDP in 2011 = Nominal GDP (2010) ×
1.961 trillion = 2 trillion ×
100
102
Nominal GDP
CPI
2016
$800 billion
100
2017
$900 billion
120
Real GDP in 2017 = Nominal GDP ×
$750 billion = $900 billion ×
100
CPI (2011)
Price index (base year)
Price index (current year)
100
120
GDP deflator is a price index that shows how an average price for all goods and services produced in
an economy change overtime. It simply gives us the price index of the current year representing the
rise in prices.
Nominal GDP
× 100
Real GDP
900
=
× 100 = 120 Represents that if prices in 2016 were 100 (index)
750
then the price index now is 120
GDP Deflator (2017) =
900
= $750 (Real GDP)
120%
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It’s called GDP deflator because it is telling us that nominal GDP is 120%
higher so we need to deflate nominal GDP
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A GDP deflator of 120 means that prices are 20% higher than base year.
Real GDP =
Nominal GDP
900
→
= 750
GDP Deflator
1.2
This means that Real GDP is $750 which is 20% lower than nominal GDP of $900
Real GDP is a better measure of economic growth than nominal GDP as it shows change in the actual
value of goods and services produced after taking inflation into account.
3) GNI (Gross National Income)
GNI = GDP + Net property income from abroad
If net property income from abroad is negative, deduct from GDP to arrive at GNI
Net property income from abroad = inflow – outflow
of all income earned by individuals, firms, and investors working in
another country but are domestic residents
all income earned by foreign individual, firms, and investors
working in domestic country and earning but are foreign residents,
for example, income earned by multinationals (MNCs) in Pakistan
will be deducted from GDP to arrive at Pakistan’s GNI
Net National Income (NNI) = GNI – Capital consumption
Depreciation
Capital consumption or depreciation refers to the value of replacement investment, i.e., replacement
capital goods that have worn out or become out of date due to wear and tear or advances in
technology.
Equilibrium National Income
Withdrawal(s) = Injections(s)
saving + imports + taxes = investment + government expenditure + exports
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4) Gini coefficient
It is a numerical measure of the extent of income inequality in an economy.
Distribution of income
Gini coefficient value
Equal income distribution (perfect equal)
0
Unequal income distribution (perfect unequal)
1
Relatively equal
Close to 0
Relatively unequal
Close to 1
The value of Gini coefficient lies between 1 and 0
A value of 03, 0.2 indicates a more equal distribution of income than a coefficient of 0.5
Similarly, a value 0.9 shows a more unequal income distribution compared to a value of 0.7
Average tax rate =
Total income tax paid
× 100
Total income
Marginal tax rate =
Change in income tax paid
× 100
Change in income
The marginal rate of tax is the proportion of extra income taken in tax, for example, if a person earns
an extra $100 and extra $30 is paid in tax for that the marginal rate of tax is 30%
30
× 100 = 30%
100
Rule for ART and MRT:
In a progressive tax system, the marginal rate of tax is higher than average rate of tax, similarly, in a
regressive tax system, the marginal rate of tax is less than the average rate of tax. Lastly, in a
proportional tax system, marginal rate of tax equals the average rate of tax
Indirect taxes – Regressive (a smaller % of income is taken in income as it rises)
Takes a higher proportion of income as tax from people on low
incomes
Direct taxes – Progressive
Takes a higher proportion of income as tax as income rises and vice
versa
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AS Economics Cheat Sheet
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5) Converting GDP at factor cost to market price
GDP at factor cost / basic price
XXX
Market price – price charged to customers
Add: taxes on product (e.g., VAT)
XXX
Indirect tax increases price hence add it
(XXX)
Subsidies decrease price hence deduct it
Less: subsidies on product
GDP at market price
GNI and GNY is the same thing, I for income and Y is used for income as well
GNY (or GNI) at market price = GDP at market price + Net factor income from abroad
If net factor income is negative then deduct
NNY (NNI) at market price = GNI – Capital Consumption
6) Unemployment
Employment rate =
Number of people employed
× 100
working age population
Unemployment rate =
Number of people unemployed
× 100
Total labor force
Labor force participation rate =
Total labor force
× 100
Total working age population
Measures of unemployment
Claimant count measure
Counts as unemployed those who register as unemployed in
order to claim unemployment benefits
Labor force survey measure
Involves conducting a survey asking people of they are
employed, unemployed or economically inactive
Students must be aware of the types of unemployment, i.e., structural, frictional, seasonal, cyclical
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Solved Questions
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Worked CPI
The table shows the individual price indices and the weightages of three goods that make up the price
index
Good
Weightage
Price index in April 2022
(April 2021 = 100)
X
0.1 (10%)
102
Y
0.4 (40%)
104
Z
0.5 (50%)
103
Calculate the percentage increase in the overall price index between April 2021 to April 2022
Calculate the weighted price index
X
0.1 × 102 =
10.2
Y
0.4 × 104 =
41.6
Z
0.5 × 103 =
51.5
103.3
Inflation rate =
Overall weighted price index in 2022
New index (2022) − Old index (2021)
× 100
Old index
=
103.3 − 100
× 100
100
= 3.3%
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Solved Questions
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Worked Real GDP Question
The table shows the values of nominal GDP and a price index in two different years
Year
2015
2019
Nominal GDP ($ billions)
250
290
Price index
100
110
What was the value of real GDP in 2019 to the nearest $ billion?
Real GDP (2019) = Nominal GDP ×
= 290 ×
Price index (base year)
Price index (current year)
100
= $264 billion
110
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Solved Questions
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Q1) The table shows the amount paid in tax by individuals at different levels of income
Income ($)
Tax paid ($)
20,000
4000
30,000
5400
40,000
6400
50,000
7000
This tax is an example of:
A) Lump sum tax
B) Progressive tax
C) Proportional tax
D) Regressive tax
Average rate of tax (ART) = Tax paid as a % of income
ART =
Tax paid
× 100
Income
Income ($)
Tax paid ($)
ART
20,000
4000
20%
30,000
5400
18%
40,000
6400
16%
50,000
7000
14%
4000
20000
× 100
5400
× 100
30000
6400
× 100
40000
7000
× 100
50000
Rules:
➢ Progressive tax is one where ART rises when income rises
➢ Regressive tax is one where ART falls as income rises
➢ Proportional tax is one where ART does not change when income rises
The correct answer is option D as ART falls when income rises
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Q) Which of the following is correct for a proportional tax on income?
A) The amount of tax paid increases as income increases
B) The marginal rate of tax is less than the average rate of tax
C) The average rate of tax falls as income rises
D) The average rate of tax is lower than marginal rate of tax
Proportional tax – All income is taxed at the same rate. It is also called flat tax, no matter how much we
earn income tax is always the same.
The average rate of tax is constant at the flat rate, so if the proportional (flat) tax rate is 20%, the average
rate of tax will be 20% as well.
Here the average rate of tax equals the marginal rate of tax as well since any extra income will also be
taxed at 20%.
Based off of the rules/observations we established above, options B and C as incorrect
Option A is the correct answer, although the rate of tax is constant the amount of tax paid will rise as
income rises as the tax rate % will be applied at a higher income.
How to calculate income tax paid
The table shows the marginal income tax rates in an economy in 2016
Taxable income
Income tax rates 2016
From $0 to $10 000
0%
From $10 001 to $30 000
10%
From $30 001 to $50 000
30%
From $50 001 and above
40%
How much income tax would be payable by someone earning $40 000 in 2016?
− The income tax rates are given in as marginal tax rates (MRT)
− $40 000 income falls in the third bracket but we will not apply 30% to the income
− We will have to work backwards:
1. Third bracket is $30 001 to $50 000, how much of the total income of $40 000 falls here?
Under this bracket, $10 000 is taxed (40 000 – 30 000) which gives us $3000 in tax.
2. See how much falls in the second income bracket, since $10 000 is already taxed, we are
left with $30 000 to tax under this bracket. (30 000 – 10 000 = 20 000 × 10% = $2000
3. Out of $40 000, $30 000 of his income is already taxed. We are now left with remaining
$10 000, which falls under the first tax bracket and is exempted so no tax.
Total tax paid = 3000 + 2000 = $5000
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Solved Questions
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Year
Money wages
CPI
2015
$5000
100
2016
$6000
125
6000−5000
Workers think wages increase by 20% (
up by 25%
5000
@adilusmanzoberi
× 100) but CPI rises to 125 hence price level goes
Calculate real wages in 2016:
➢ Apply the same formula that is used to calculate real GDP
Real wages (2016) = Nominal wages ×
$4800 = 6000 ×
Price index (base year)
Price index (current year)
100
125
Hence in real terms workers income has fallen by 4% from $5000 in 2015 to $4800 in 2016, real wage
in 2015 is equal to nominal wage in base year.
Analysis:
With an inflation rate of 25%, a 20% rise in nominal wages makes the worker worse off by 4%
Real interest rate = Nominal interest rate – inflation rate
5% = 8% − 3%
-1 = 8% − 9%
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Unemployment MCQs
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Q1) The table shows data for an economy’s labour market.
million
number of people of working age
42.7
Number of people of working age who are
actively seeking work, but are not working
2.2
Number of people of working age who are
not actively seeking work
9.4
What is the economy’s percentage employment rate, to the nearest whole number?
A) 5%
B) 23%
C) 73%
D) 95%
Number of people of
Number of people of working age − working age not actively
seeking work
=
Number of people of
working age actively
seeking work
42.7 – 9.4 = 33.3
Number of people of working age seeking work, out of these some might be employed
and some unemployed.
Technically, this represents your labor force now, since labor force consists of all
those people who are employed or unemployed but are actively seeking work – this
means economically active
Number of people of working age −
Number of people of
working age but not working
=
Number of people of
working age working
33.2 – 2.2 = 31.1 million employed
Employment rate =
number of people employed
Working age population
From the desk of Adil Usman
31.1
× 100 = 42.7 × 100 = 73%
P a g e | 10
Unemployment MCQs
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Q2) Which type of unemployment is correctly linked to the description of its cause?
Type of
unemployment
Description of the cause
A
Cyclical
A change in demand due to holiday period
B
Frictional
A lack of sufficient information
C
Structural
A temporary change in consumer expenditure
D
Technological
A general decrease in the demand for goods
Answer is option B since frictional unemployment consists of people in search for jobs and often
lacking information about job vacancies.
Q3) In 2007 Turkey had a population of 73 tn. Its labour force was 36 m, of which 12 m were trained
for the primary sector and 24 in were trained for the secondary and tertiary sectors. The
unemployment rate was 10%. What was the number of people unemployed?
A) 1.2m
B) 2.4 m
C) 3.6 m
D) 7.3 m
The correct answer choice is C
Unemployment rate =
Number of unemployed people
× 100
labor force
Thus,
10
× 36 = 3.6 million
100
Q4) An economy's manufacturing share of real GDP fell from 30% in 1970 to 12% in 2016. What type
of unemployment would result from this?
A) cyclical
Answer: C
B) frictional
Decrease in share of GDP by manufacturing suggests a decline in
manufacturing sector leading to job losses. Hence the skills of some of
manufacturing workers are no longer in demand. This is indicative of
structural unemployment. Types of unemployment given in other options do
not necessarily result from a fall in share of GDP of a particular sector.
C) structural
D) voluntary
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Q5) Why do some economists suggest there may be positive benefits from frictional unemployment?
A) A short supply of frictional unemployment may lead workers to become discouraged
B) Frictional unemployment allows time for retraining in newly emerging skills
C) Job search during frictional unemployment may lead to a better match of workers and jobs
D) The psychological effects of frictional unemployment are less than the economic effects
Answer: C
Options A, B, and D suggest negative effects of frictional unemployment.
Q6) Which type of unemployment occurs when aggregate demand is deficient?
A) Cyclical unemployment
B) Regional unemployment
C) Seasonal unemployment
D) Structural unemployment
Answer: A
Deficiency of aggregate demand suggests recession that is associated with business cycle
Q7) What would not be classified as structural unemployment?
A) A car worker who is replaced by a robot on the production line
B) A coal miner whose mine closes because of increased use of solar power
C) A fruit picker who cannot find work in the winter months
D) A textile worker whose factory closes and production moves abroad
Answer: C
It is seasonal unemployment. All other options suggest unemployment resulting from structural
changes in the economy, therefore, they are examples of structural unemployment.
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Unemployment MCQs
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Q8) Which policy is specifically designed to reduce the level of structural unemployment?
A) An increase in the level of state benefits paid to the unemployed
B) A reduction in interest rates
C) A reduction in the level of direct taxation
D) The provision of retraining schemes
Answer: D
Structural unemployment is the result of a mismatch between the skills required and the skills
possessed by the workers, therefore retraining will help. Option A is likely to increase it while B and C
would reduce demand deficient unemployment
Q9) A country has a population of 100 million. There are 5 million people unemployed and the country
has an unemployment rate of 10%
What is the size of the country’s labor force?
Unemployment rate =
10% =
Number of people unemployment
× 100
Total labor force
5
× 100
x
0.1x = 500
x = 5 million
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National income Statistics - MCQs
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Q1) The information in the table is taken forma country’s national income accounts.
$ million
National income
600
Consumer spending
400
Investment spending
80
Government spending on goods and services
100
Taxation
90
imports
120
What is the value of exports?
A) $100 million
B) $120 million
C) $140 million
D) $230 million
Answer: C
C + I + G + (X – M) = 600
C + I + G – m = 460
Hence X must have been $140 million. Taxation is not part of the calculation
Q2) The table shows some data for an economy
Investment
$m
Exports
$m
Government
expenditure
$m
Savings
$m
Imports
$m
Taxation
$m
National
income $m
200
100
50
50
12
100
700
200
100
50
60
140
150
800
200
100
50
75
160
200
900
200
100
50
100
180
275
1000
What is the equilibrium level of national income?
A) $700 m
B) $800 m
Answer: B
C) $900 m
Where the sum of leakages is equal to the sum of injections, national
income (NY) is said to be in equilibrium, i.e., I + G + X = S + T + M
D) $1000 m
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National income Statistics - MCQs
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Q3) The table shows data on a country’s gross national product at market prices and on domestic
spending
Year 1
Year 2
Year 3
($m)
($m)
($m)
GNP at market prices
420
440
560
Private consumption
200
260
300
Government consumption
120
120
140
Gross investment
90
80
130
In which of these years will the country be faced with a deficit on the current account of the balance
of payments?
Year 1
Year 2
Year 3
A)
❌
✔
✔
B)
❌
✔
❌
C)
✔
❌
✔
D)
✔
❌
❌
Answer: A
GNP = GDP + Net factor income
GDP market price = C +I + G (based on expenditure method)
Year 1 = 410 [200 + 120 + 90]
Year 2 = 460 [260 + 120 + 80]
Year 3 = 570 [300 + 140 + 130]
Net factor income:
Year 1 = 420-410 = 10
Year 2 = 440 – 460 = -20
Year 3 = 560 – 570 = -10
Net factor income is positive in year 1 hence there will not be a deficit on current account but in year 2
and year 3 its negative so current account will be in deficit
From the desk of Adil Usman
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National income Statistics - MCQs
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Q4) The table shows some data for an economy
Investment
$m
Exports
$m
Government
expenditure
$m
Savings
$m
Imports
$m
Taxation
$m
National
income $m
200
100
50
125
62.5
62.5
600
200
100
50
150
75
75
700
200
100
50
175
87.5
87.5
800
200
100
50
200
100
100
900
What is the equilibrium level of national income?
A) $600 m
B) $700 m
C) $800 m
D) $900 m
Answer: C
In an open economy with government, national income equilibrium level is achieved when
S+T+M=I+G+X
Q5) The information in the table is taken forma country’s national income accounts.
$ million
National income
600
Consumer spending
400
Investment spending
80
Government spending on goods and services
100
Exports
140
What is the value of imports?
A) $100 million
B) $120 million
C) $140 million
D) $240 million
Answer: B
C + I + G + (X – M) = 600, C + I + G + X = 720, hence X must have been $120 million.
From the desk of Adil Usman
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National income Statistics - MCQs
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Q6) The information in the table is taken from a country’s national income accounts.
US $
millions
Income
Wages
8000
Salaries
7000
Unemployment benefits
1000
Pensions
1000
Rent
3000
Interest
2000
What is the value of national income?
A) 17 000
B) 19 000
C) 20 000
D) 21 000
Answer: C
Unemployment and pensions are not included in national income calculation because they are
considered transfer payments, i.e., payments received without any corresponding output.
Q7) The table shows the figures for consumption, gross capital formation and depreciation in four
economies, all measured in US $.
Assuming that the state of technology remains unchanged, which economy is most likely to
experience economic growth?
economy
Consumption
($m)
Gross capital formation
($m)
Depreciation
($m)
A)
200
40
50
B)
500
200
150
C)
1000
1200
1400
D)
20 000
6000
6000
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National income Statistics - MCQs
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Answer: B
Net capital formation = gross capital formation – depreciation
Positive net capital formation causes economic growth. Gross capital formation means investments
made in the economy on capital, equipment machinery building’s factories etc. Gross capital formation
includes both investments in new assets and the replacement or repair of existing ones. Hence, we
deduct the replacement investment/depreciation/capital consumption from it to arrive at net capital
formation.
Net capital formation: It takes into account the gross capital formation (total investments in physical
assets) and deducts the depreciation or wear and tear on existing assets. In other words, net capital
formation accounts for the amount of investment that contributes to expanding the productive capacity
of an economy. It reflects the net addition to the stock of capital goods and is an important indicator of
the sustainability of economic growth.
Positive net capital formation means outward shift in PPC and rise in productive capacity.
Q8) The table gives data for an economy.
2010
2011
2012
2013
2014
Gross Domestic Product (GDP)
at current prices ($ billion)
200
220
240
300
320
GDP deflator (price index)
100
109
125
149
154
In which year did real GDP decline compared with the previous year?
A) 2011
B) 2012
C) 2013
D) 2014
Answer: B
Real GDP =
Nominal GDP
× 100
GDP Deflator
Real GDP in 2010 =
200
× 100 = $200 billion
100
Real GDP in 2011 =
220
× 100 = $202 billion
109
Real GDP in 2012 =
240
× 100 = $192 billion
125
Real GDP in 2013 =
300
× 100 = $201 billion
149
Real GDP in 2014 =
320
× 100 = $208 billion
154
From the desk of Adil Usman
From the calculation, it can be observed
that the real GDP only declines in 2012
P a g e | 18