Extra-Notes: Econ141: Review questions
These notes or questions are meant to help you prepare for your
Mid Term Exam.
They are not exam questions but past years exam questions.
You are also strongly advised to use the "Study Guide"
GNP = GDP + NFI (Net Factor Income)
NFI = factor income received - factor income paid
So, if NFI equals zero, GDP = GNP
NFI is negative, GDP > GNP
NFI is positive, GDP < GNP
GDP = NDI at factor cost + indirect taxes + depreciation –
subsidy
Depreciation: is wear and tear of capital.
Note: subsidies can be considered as negative taxes so,
Net indirect taxes = indirect taxes – subsidies
National Income or Net Domestic Income at Factor Cost (NDI).
Net Domestic Income (NDI) = Compensation of Employees +
Rental Income + Net interest + Corporate Profit + Proprietor's
Income.
Factor cost is the cost of factors of production used to produce
final goods and services.
To calculate GDP using market value we must add Net Indirect
Tax (NIT) and Depreciation:
GDP = NDI + net indirect tax (NIT) +Depreciation (D)
Net indirect tax = Indirect Tax – Subsidies
Indirect tax is a tax paid by consumers when they buy goods and
services. Because of indirect taxes consumers pay more for the
goods and services than producers receive ⇒ market price >
factor cost.
Subsidy is a payment made by a government to a producer.
Because of subsidies consumers pay less for some goods and
services than producers receive ⇒ factor cost > market price
Depreciation is the decrease in the capital stock because of the
wearing out of machines and equipments (is the consumption of
the capital). It is treated as a cost of production and is subtracted
in calculation NDI. So it must be added back to get the GDP.
Gross and Net Domestic Product:
“Gross” means before accounting for the depreciation of capital.
“Net” means after accounting for the depreciation of capital.
Net domestic product = GDP – Depreciation
Other National Concepts:
Per Capita GDP = GDP / Population in the economy
Net Domestic Product (NDP) = GDP – Depreciation
National Income (NI) = NDP + Net Income Earned Abroad –
Indirect Business Taxes
Personal Income (PI) = NI – Corporate Income Taxes +
Undistributed Profits – Social Security + Transfer Payments
(Public and Private)
Disposable Income (DI) = PI – Personal Income Taxes
Disposable income (DI) = Consumption (C) + Savings (S)
Examples:
1.
(a) A country had C equal to $1 billion, G equal to $700 million, I equal to $500 million,
and imports were $200 million less than exports, what was the country's GDP?
GDP=C+G+I+(X-M)
1+0.7+0.5+0.2=2.4
(b) A country had C equal to $1 billion, G equal to $700 million, I equal to $500 million, and
imports were $300 million more than exports, what was the country's GDP?
GDP=C+G+I+(X-M)
=1+0.7+0.5-0.3=1.9
2. A country had the following data: income (Y) = $200,000, taxes (T) = $60,000, government
purchases (G) = $45,000, consumption (C) = $120,000, exports (X) = $65,000 and imports (M) =
$70,000.
a. What was the country's private saving or households and businesses saving?
Y=C+S+T→S=Y-C-T→S=200-120-60=20,000
b. What was the government saving (or government surplus)?
GS= T-G=60-45=15,000
c. What was the national saving?
NS=PS+GS=20+15=35,000
PS= NS - GS
d. Is the country lending or borrowing from the rest of the world and by how much?
X-M=60-70= -5,000
e. What was the country's investment?
I=PS+ GS+ borrow=20+15+5=40,000
f. How much investment is financed by national saving and how much investment is financed by
the lending or borrowing from the rest of the world?
35+5 borrowing
3. Consider the following data (in million dinars) for a country in 2005:
Personal consumption expenditure
1380
Compensation of employees (wages)
1400
Corporation Profits
300
Net interest
100
Government purchases of goods and services
590
GDP
2435
Gross private domestic investment
415
Net taxes
700
Rental income
150
Depreciation
90
Proprietor's income
220
GNP
2359
Referring to the table above:
3.1. What was the country's net domestic product (NDP)?
(a) 2435
(b) 2345
(c) 1735
(d) 2525
NDP=GDP-D →2435-90=2345
3.2. What was the country's net export (NX)?
(a) 50
(b) 40
(c) -40
(d) -50
Since GDP=C+I+G+NX
Therefore,
NX=GDP-C-I-G=2435-1380-415-590=50
3.3. The country is a:
(a) borrower (b) lender
because NX>0
3.4 What was the country's net domestic income (NDI)?
NDI=5 incomes
1400+300+100+150+220=2170
(a) 2178
(b) 2165
(c) 2170
(d) 2175
3.5 How much were households and businesses saving?
(a)1055
(b) 355
Y-C-T=2435-1380-700=355
3.6 How much were the national saving?
PS=355 ,GS=T-G=700-590=110
NS=PS+GS=465
(a) 465
(b) 355
(c) 820
3.7 What is the country's net factor income (NFI)?
( a) 76
(b) -76
(c) -54
3.8 What is the country's net indirect tax?
( a) 175
(b) 150
(d) 512
(d) 54
(c) 700
(d) 100
4. Consider the following data for a country for two years:
Suppose the only goods produced and consumed in an economy are food and clothing. The following table shows data on
the quantities and prices of output in different years: Prices are in $ per unit. Take 2004=100.
Year
Food
(quantity)
2004
2005
1000
1200
Price
of
Food
$5
$5
Clothing
(quantity)
Price of Nominal GDP
clothing
500
550
$6
$8
1000×5+500×6=8000
1200×5+550×8=10,400
4.1. What was the nominal GDP for 2005?
(a) 10,400 (b) $10,400
(c) 12,400 (d) $12,400
1200×5+550×8=10,400
4.2. What was the real GDP for 2005?
(a) $9,300
(b) 9,300 (c) $9,900 (d) 9,900
4.3.
1200×5+550×6=9,300
Refer to above table, what was the GDP deflator for 2005?
(a) $125.2
(b)125.2
(c) $111.8
(d)111.8
GDP deflator= (Nominal GDP/ Real GDP) × 100
GDP deflator= ($10,400/ 9,300) × 100 = 111.8
Real GDP
8000
9,300
4.4. Refer to above table, what was the economic growth rate during 2005?
(a) 16.25%
(b)30%
(c)10%
(d)15%
Growth Rate in Real Term= (9,300-8000/8000) × 100 = 16.25%
5. The table below shows the transaction in the country of Pinkland last year:
Items:
Compensation of employees
Consumption expenditure
Net Indirect Taxes
Transfer payments
Corporate Profits
Investment expenditure
Government purchases of goods and services
Exports
Depreciation
Net Interest income
Imports
Amount (millions of dollars)
100
120
40
15
35
30
50
30
40
15
40
1) What was the GDP in Pinkland last year?
GDP = C + I + G + (X  M) = $120 + $30 +$50 + ($30  $40) = $190 million.
5.2) What approach did you use to make this calculation?
The expenditure approach is used, which measures GDP as C + I + G + (X  M).
5.3) What was the Net Domestic Product, NDP, in Pinkland last year?.
NDP = GDP – D = 190-40 = 150.
5.4) What was the value of total output in Pinkland last year?
Value of total output is equal to nominal GDP = $190 million.
5.5) If the (real) GDP in Pinkland last year was 160, what was the GDP deflator in Pinkland last year?
GDP deflator is equal to (nominal GDP/ real GDP) X 100 = (190/160) X100 = 118.75
Examples:
1. You are given the following data:
Items:
Gross income from employment
Gross trading profits of companies
Rent
Transfer payment
Indirect taxation
Net interest
Depreciation
What is the level of GDP at market prices?
Million $
3000
500
100
90
150
60
40
2.You are given the following data:
Items:
Consumer expenditures
Government final expenditures
Gross domestic fixed capital formation
New housing
Exports of goods and services
Imports of goods and services
Taxes on expenditures
Subsidies
Million $
1050
600
500
100
850
950
500
50
Use the above data to calculate:
a- Total of domestic expenditures (consumer exp. + Gov. Exp. + Gross FC + new housing)
b- Total final expenditures (total domestic exp. + exports)
c- GDP at market prices (total final exp. – imports)
3.The financial transactions for a country with values stated in billions of dollars are listed below:
You are given the following data:
Gross domestic product
Transfer payments
Corporate income taxes
Social security contributions
Indirect business taxes
Personal taxes
undistributed corporate profits
depreciation
net income earned abroad
Billions $
4000
500
50
200
210
250
25
50 0
Zero
4.Exercise:
Items:
Government purchase
Gross private domestic investment
Personal consumption expenditure
Personal income taxes
Depreciation
Net taxes
Net exports
Net interest
Million $
$400
$500
$700
$150
$200
$100
$200
$130
a. Calculate GDP ($1800)
b. Calculate Net domestic income ($1600)
5.Exercise:
Items:
Net interest
Net indirect tax
Corporate profits
Proprietors’ income
Compensation of employees
Depreciation
Rental income
Personal consumption expenditure
Net exports
Government purchase
Million $
$200
$300
$400
$150
$1200
$350
$100
$1500
$50
$600
a. Calculate GDP ($2700)
b. Calculate net domestic product ($2350)
c. Calculate gross private domestic investment ($550)
6.Exercise :
Items :
C
G
T
I
M
X
Depreciation
Billions of dollars
80
30
35
20
10
20
10
Calculate:
a. GDP
b. Net domestic product
c. the value of net exports
d. the value of private saving
e. the value of government saving
f. government budget deficit or surplus)
9
.
10
11