World Economy Final - Week 2

Front 1

The most fundamental measure of an economy’s welfare is:

a. the employment level divided by the population

b. real output per person

c. the consumer price index

d. the relative value of the economy’s currency on the world market

e. the trade deficit or surplus

Back 1

B. REAL OUTPUT PERSON

Front 2

Real GDP is a better measure than nominal GDP because:

a. nominal GDP includes only tangible goods, while real GDP also includes intangible output such as consulting services

b. nominal GDP is what could be produced if production were perfectly efficient, whereas real GDP is a measure of what is actually produced

c. real GDP includes foreign production by US firms, but nominal GDP doesn’t

d. nominal GDP rises with inflation, but real GDP doesn’t

e. nominal GDP double-counts intermediate goods, while real GDP counts only final goods

Back 2

D. NOMINAL GDP RISES WITH INFLATION, BUT REAL GDP DOENSN'T

Front 3

In most industrial economies, the largest component of national income is:

a. wages and salaries

b. corporate profits

c. interest on bank accounts and bonds

d. rental income

e. proprietors’ income from non-corporate businesses

Back 3

A. WAGES AND SALARIES

Front 4

The shares of national income paid to labour and capital owners respectively are about:

a. 10% and 90%
b. 40% and 60%
c. 50% and 50%
d. 70% and 30%
e. 85% and 15%

Back 4

D. 70% AND 30%

Front 5

The next three questions refer to the following hypothetical economy:
In one year, an economy produces 100 units of capital goods, which sell for £30 each, and 200 units of consumer goods, which sell for £10 each. In the second year, 150 units of capital are produced, and sold for £20 each, while 220 units of consumer goods are produced and sold for £20 each. In the third year, 160 units of capital are sold for £30 each, and 200 units of consumer goods are sold for £20 each.

Nominal GDP in the three years is:

a. 300 in year one, 370 in year two, and 360 in year three

b. 2500 in year one, 3700 in year two, and 4400 in year three

c. 5000 in year one, 6700 in year two, and 6800 in year three

d. 5000 in year one, 7400 in year two, and 8800 in year three

e. 40 in year one, 40 in year two, and 50 in year three

Back 5

D. 5000 IN YEAR ONE, 7400 IN YEAR TWO, AND 8800 IN YEAR 3

Front 6

The next three questions refer to the following hypothetical economy:
In one year, an economy produces 100 units of capital goods, which sell for £30 each, and 200 units of consumer goods, which sell for £10 each. In the second year, 150 units of capital are produced, and sold for £20 each, while 220 units of consumer goods are produced and sold for £20 each. In the third year, 160 units of capital are sold for £30 each, and 200 units of consumer goods are sold for £20 each.

With year one as the base year, real GDP in the three years is:

a. 300 in year one, 370 in year two, and 360 in year three

b. 2500 in year one, 3700 in year two, and 4400 in year three

c. 5000 in year one, 6700 in year two, and 6800 in year three

d. 5000 in year one, 7400 in year two, and 8800 in year three

e. 40 in year one, 40 in year two, and 50 in year three

Back 6

C. 5000 IN YEAR ONE, 6700 IN YEAR TWO, AND 6800 IN YEAR THREE

Front 7

The next three questions refer to the following hypothetical economy:
In one year, an economy produces 100 units of capital goods, which sell for £30 each, and 200 units of consumer goods, which sell for £10 each. In the second year, 150 units of capital are produced, and sold for £20 each, while 220 units of consumer goods are produced and sold for £20 each. In the third year, 160 units of capital are sold for £30 each, and 200 units of consumer goods are sold for £20 each.

If year one is taken as the base year, the GDP deflator in years two and three is:

a. 1.0 in year two and 1.1 in year three
b. 1.0 in year two and 2.0 in year three
c. 1.23 in year two and 1.12 in year three
d. 1.5 in year two and 1.10 in year three
e. 1.10 in year two and 1.29 in year three

Back 7

E. 1.1 IN YEAR TWO AND 1.29 IN YEAR THREE

Front 8

[REFER TO CHART]

The next two questions refer to the following hypothetical economy.

A nation produces 1000 units of output. It sells 800 of these to domestic consumers at a price of £4 per unit, and exports the remaining 200 units to countries overseas at a price of £5 per unit. The country also imports 100 units of another good at a price of £6 per unit. There is neither investment nor government expenditure in this economy.

This country’s gross domestic product, as measured by expenditure, is:

a. 4200
b. 3200
c. 3600
d. 2800
e. 3800

Back 8

C. 3600
{Y = C + I + G + (X-M)}

Front 9

[REFER TO CHART]

The next two questions refer to the following hypothetical economy.

A nation produces 1000 units of output. It sells 800 of these to domestic consumers at a price of £4 per unit, and exports the remaining 200 units to countries overseas at a price of £5 per unit. The country also imports 100 units of another good at a price of £6 per unit. There is neither investment nor government expenditure in this economy.

Which of these factors is not considered when measuring Gross National Happiness?
a. Psychological well-being
b. Literacy
c. Working Hours
d. Housing Quality
e. Gross National Income

Back 9

E. GROSS NATIONAL INCOME

Front 10

Which of these economies will have the highest GDP?

a. Economy A – households employ cleaners

b. Economy B – households employ cleaners which they pay “cash-in-hand”

c. Economy C – households do not employ cleaners

d. GDP will be the same in all three economies

Back 10

A. ECONOMY A - HOUSEHOLDS EMPLOY CLEANERS

Economy A will have the highest measured (or recorded) value of GDP. Paying cash in hand means that the income of the cleaners in Economy B is not declared and therefore not included in GDP (these would form part of the underground economy). In Economy C, where households do not employ cleaners, there is no monetary transaction and hence this is not included in GDP. In this case, the GDP in Economy A will be overstated relative to Economies B and C.

Front 11

Consider an economy with 3 productive sectors: (1) mining & farming, (2) manufacturing and (3) retailing.

Retailers:
 -sell goods worth: £500 to consumers
 -buy goods worth: £400 from manufacturers and £50 from miners & farmers

Manufacturers:
 -sell goods worth: £400 to retailers and £100 to consumers
 -buy goods worth: £200 from miners & farmers

Miners & Farmers:
 -sell goods worth: £200 to manufacturers, £100 to consumers and £50 to retailers
 -buy goods worth: £0

a. What is the Value Added in each sector?

Back 11

Manufacturers value added is: total sales of 500 less inputs of 200 = 300

Retailers value added is: total sales of 500 less inputs of 450 = 50

Miners & Farmers value added is: total sales of 350 less no inputs = 350

Front 12

Consider an economy with 3 productive sectors: (1) mining & farming, (2) manufacturing and (3) retailing.

Retailers:
 -sell goods worth: £500 to consumers
 -buy goods worth: £400 from manufacturers and £50 from miners & farmers

Manufacturers:
 -sell goods worth: £400 to retailers and £100 to consumers
 -buy goods worth: £200 from miners & farmers

Miners & Farmers:
 -sell goods worth: £200 to manufacturers, £100 to consumers and £50 to retailers
 -buy goods worth: £0

b. What is the total output for the economy?

Back 12

Total output = Total Value Added = 50 + 300 + 350 = 700

Front 13

The National Accounts for Australia show (in A$bn):
Total Consumption: $418 billion
Investment: $158 billion
Government Spending: $125 billion
Total Exports: $151 billion
Total Imports: $156 billion

a. What is the value of Australian GDP?

Back 13

GDP is C+I+G+X-M = A$418+A$158+A$125+A$151-A$156 = A$696

Front 14

The National Accounts for Australia show (in A$bn):
Total Consumption: $418 billion
Investment: $158 billion
Government Spending: $125 billion
Total Exports: $151 billion
Total Imports: $156 billion

b. Suppose consumption increases by 10% but output only increases by 5%. Investment and government spending both increase by 3%. What happens to the gap between exports and imports?

Back 14

After the changes the figures are: A$459.8 + A$162.7 +A$128.8+X-M = A$730.8

Thus X-M = - A$20.5 so net exports becomes more negative (it was -A$5). The increase in Australian output (GDP) is not enough to meet the increase in demand for goods (from consumption, investment and the government) and so the country imports more from overseas (or reduces its exports).

Front 15

[REFER TO TABLE]

An economy consists of two industries. The table has data on the quantity produced and the price for each industry. For the whole economy, calculate for each year

(a) Nominal GDP

Back 15

= total value for the two industries
= (price x quantity)Industry 1 + (price x quantity)Industry 2

2008: (4 x 2) + (10 x 1) = 18
2009: (5 x 3) + (12 x 1) = 27
2010: (8 x 4) + (12 x 2) = 56

Front 16

[REFER TO TABLE]

An economy consists of two industries. The table has data on the quantity produced and the price for each industry. For the whole economy, calculate for each year

(b) Real GDP with base year 2009

Back 16

Real GDP with base value 2009
= total value at year 2009 prices
= ((year 2000 price) x quantity)Industry 1 +((year 2000 price) x quantity)Industry 2

2008: (4 x 3) + (10 x 1) = 22
2009: (5 x 3) + (12 x 1) = 27
2010: (8 x 3) + (12 x 1) = 36

Front 17

[REFER TO TABLE]

An economy consists of two industries. The table has data on the quantity produced and the price for each industry. For the whole economy, calculate for each year

(c) The GDP deflator (2009=100)

Back 17

= [Nominal GDP / Real GDP]
GDP Deflator with (2000 = 100) = 100 x [Nominal GDP / Real GDP]

2008: 100 x (18/22) = 86
2009: 100 x (27/27) = 100
2010: 100 x (56/36) = 156

Front 18

[REFER TO TABLE]

What are the rate of growth and the rate of inflation between years 2009 and 2010?

Back 18

RATE OF GROWTH = 100 X (CURRENT YEAR - PREVIOUS YEAR) / PREVIOUS YEAR

Rate of Growth of Real GDP = 100 x [(36 - 27) / 27] = 33%
Rate of Growth of Inflation = 100 x [(156 - 100) / 100] = 56%

Front 19

[REFER TO TABLE]

Calculate the average rate of growth of real GDP over from 2008 - 2010.

LOOK ON WORKSHEET, #15

Back 19

LOOK ON WORKSHEET, #15

Front 20

If this average rate of growth continues, in what year would real GDP be twice as
large as in 2009?

Back 20

n = (1/0.246) ln 2 = 2.82 years