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UNIVERSITY OF KARACHI
ASSIGNMENT # 1 (MACRO-ECONOMICS)
B.S (2ND Year)
DR. KHALID MUSTAFA
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
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
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?
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?
Ans. No, Domestic Investment is different rather than investment in other country.
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
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.
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.
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
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.
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.
Ans. No, Domestic Investment is different rather than investment in other country,
because
• A firm's purchasing a car for an executive and the firm's paying the executive
additional income to purchase a car ?
That is, in fact, one of the points of what GDP fails to measure.
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
NDP = GDP - CC
NDP = Net domestic product
NDP = 4'000 - 500 = 3'500
DI = PI - Personal taxes
DI = Disposable income
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
Y=C+I+G+NX
NDP = GDP-CC
Sg = T-G-TP
30 = T-1'100-TP
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
NDP = GDP - CC
NDP = Net domestic product
DI = PI - Personal taxes
DI = Disposable income
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
Seems like "depreciation" is missed from list (it should be =10 for your task).
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