Workshop 20

(The Macroeconomic Environment)

Determination of GDP

1. (a) If a household earns £200 a week and spends £150 each week on domestically produced
goods and services, how much does it withdraw from the circular flow?

....................................................................................................

(b) What forms will these withdrawals take? ................................................................................

(c) Assume that total household incomes rise from £500bn to £550bn. Assume that this results
in the consumption of domestically produced goods and services rising from £450bn to
£490bn. What is the mpcd?
....................................................................................................

(d) Assuming that the mpcd remains constant, what will the level of consumption of
domestically produced goods and services be if national income now rises to £700bn?

....................................................................................................

(e) If total UK consumption of domestically produced goods and services is £490bn and
injections into the circular flow of income are £80bn, what will be the level of aggregate
expenditure (E)?
....................................................................................................

(f) Given your answer to (e), and assuming that total household incomes are currently £550bn,
what will happen to household income?
Rise / Fall / Stay the same

(g) What is the formula for the marginal propensity to withdraw?

GDP/W; W/J; W/GDP; J/W

(h) What are the answers to the following? (Use a number or another term as appropriate.)

(i) GDP – W = ........................................

(ii) mpcd + mpw = ...................................

(iii) 1–mpcd = ...........................................

2. (a) Assuming that injections are constant at all levels of national income at £20 billion,
complete the following table.

Real GDP (£bn) 40 80 120 160 200 240 280

Consumption (Cd) (£bn) 40 70 100 130 160 190 220

Injections (J) (£bn)

Withdrawals (W) (£bn)

Aggregate expenditure (E) (£bn)

(b) Calculate the marginal propensity to consume domestically produced goods (mpcd).

..........................................................................................................................................

(c) On the diagram below, label the line shown and then plot Cd , J and aggregate expenditure
(E) against real GDP.

Cd, J, W 280
(£bn)

240

200

160

120

80

40

0
0 40 80 120 160 200 240 280

Real GDP (£bn)

(d) What will be the equilibrium level of income (where E = GDP)? ..........................................

(e) What are withdrawals and injections at this level of income? W…..……. J ..................
(f) Plot the withdrawals line on the diagram.
You should now be able to see that there are two ways of finding the equilibrium level of GDP.

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3. In a closed economy (i.e. one that does not engage in foreign trade), spending on consumer goods
is related to GDP by the following schedule:

GDP (£bn) 0 20 40 60 80 100 120 140 160 180

Cd (£bn) 4 20 36 52 68 84 100 116 132 148

J (£bn)

E (£bn)

If firms are investing at a rate of £8bn per year and the government is spending £12bn per year:

(a) Fill in the figures in the table for total injections (J) and aggregate expenditure (E).

(b) What is the equilibrium level of GDP? ....................................................................................

(c) What is the mpcd? ....................................................................................................................

(d) What is the value of the expenditure multiplier? .....................................................................

(e) Suppose that full employment yields a GDP of £140bn per annum, by how much must
government expenditure be changed to reach full-employment GDP?

..........................................................................................................................................

(f) Does the initial equilibrium situation represent an inflationary or a deflationary gap, and
what is the size of this gap?

..........................................................................................................................................

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4. Examine the following diagram:

Cd, W, J

GDP (= Cd + W)
m
E

n
Cd
l
k t
h s
u v
r
g
q

O a b d f GDP

Identify the correct letters for each of the following (circle the correct answer):

(a) Equilibrium GDP ...........................................................(i) Oa (ii) Ob (iii) Od (iv) Of

(b) Injections at a level of GDP of Oa .................................(i) aq (ii) ah (iii) hq (iv) qahq

(c) Withdrawals at a level of GDP of Of .................................... (i) tf (ii) nt (iii) mt (iv) mn

(d) mpcd ...................................................................... (i) ur/su (ii) su/ur (iii) mt/tl (iv) tr/tv

(e) The amount that withdrawals rise when GDP rises from Od to Of
(i) tn (ii) nm (iii) tm (iv) ln (v) lm

(f) mpw ...................................................................... (i) tn/df (ii) nm/df (iii) df/tn (iv) df/nm

(g) The multiplier .................................................... (i) tn/df (ii) nm/df (iii) df/tn (iv) df/nm