MACRO-ECONOMICS ASSIGNMENT QN1

MACRO-ECONOMICS ASSIGNMENT
QN1.

GDP = Rent+Wages+Interest+Profit
= 482+2651+0+1687= $4820 B
GDP=Consumption+ Investment+ Government+ (Export-Import)
=3115+785+(585+210)+(690-565)
=$4820 B
GNE=C+I+G
=3115+785+(585+210)
=$4695 B
Net Domestic Product= GDP-Depreciation
=4820-320
=$4500 B
Net Domestic Product can be a better measure for economic performance because it is a net value after depreciation whereas GDP include depreciation which is difficult to calculate.

GNP= GDP-Income paid to overseas
=4820-34
=$4786 B
Net National Product=GNP-Depreciation
=4786-320
=$4466 B
Current Account Balance=(Export –Import)-Income paid to overseas
= (690-565)-34
= $91 B
Gross National Saving=GDP-Consumption Expenditure
=4820-3115
=$1705 B
If tax revenue is $17B, then
National Saving =Current Account Balance+ National Investment
=91+785
=$876 B
National Saving after tax revenue=876+17
=$893 B
If MBCd =0.63
GDP=$4873
Domestic Consumption=?
MPC=Change in Consumption/Change in Income
Now, GDP=C+I+G+(X-M)
4873 = C+785+795+125
C= 4873 – 1705
D C= 3168
Now, MPC = ?C
?Y
0.63 = 3168-3115
? Y
? Y = 53
0.63
? Y = 84.12
The change in income = 84.12
X = 690+4=694
Inv = 785-3 =782
Gov.Con = 585-3=582
Gov.Inv = 210+4=214

Gov Exp = 582+214= 796
Now, GDP = C+I+G+(X-M)
GDP = 3168+782+796+(694-565)
New GDP= 4875
Change in GDP = 4875-4820
Income in GDP = 55
QNO.2
(i) A windscreen purchased by a motor vehicle spare parts supplier is intermediate goods because the supplier sells the products to others as second hand goods .
(ii) A new bulldozer to be used by a construction company is final goods as well as intermediate goods. It is final goods if it is used for construction purpose by Construction Company and it is also intermediate goods if it is for rental purpose by others.
(iii) A household cleaning service purchased by a family from a domestic cleaning service company is final goods because it is direct used and consumed by family for their personal purpose.

(iv) Coking coal is intermediate goods because it is raw material for making steel production. It is used in steel, steam and iron making products.
The nation’s GDP is $870 billion because GDP is focused on total market value of final goods and services produced by local or foreigner within the national territory. GDP includes level of production rather than sales.

A new truck sold for use by a mining company is a final good , even though it is a fixed investment used to produce other goods because it is finally used by mining company . it is a new production for specific year. It is fixed investment to produce new product Finally , intermediate goods are not included in GDP.

QNO.3. Inflation means income in the general price level of goods and services in an economy.

Demand Pull Inflation:
When there is increase in aggregate demand in terms of household consumption, business, government expenditure and foreign buyers then the price also rises which create demand pull inflation. This is also called “too much money chasing too few goods”. For instance, the hyper inflation faced by Zimbabwe in mid 1990’s.

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Cost Push Inflation :
It is the rise in price level with the rise in the cost of production. It means price cannot increase only by high demand but price can also be increased by cost of production. If the price is high, then quantity demand will be low. In this case, there will be less production because of less demand.

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(B) The causes of Demand Pull Inflation and Cost Push Inflation are as follows :Demand Pull inflation :
i. Growth of population stimulates aggregate demand
ii. Holders of black money to spend more on conspicuous goods.

Cost Push Inflation :
Rise in the price of raw materials.

Rise in labor change.

New technology.

QNO.6
a.

CPI is an index which measures the change in the average price of consumer goods and services .It is one of several price indices calculated by most national statistical agencies. It is also called cost of living index.

CPI includes only consumer goods and services in order to determine how rising price affect the income of consumer.

Some advantages are as follows:
The CPI measures inflation only at final stage of production.
It is more reliable as compared to the WPI.
The price prevailing in the lowest level is considered thus a true picture of inflation is given.
It includes service sector also.

Some disadvantages are as follows :
Product quality changes may leads to fails in account of CPI.

New Products
Substitutes
Buying Habits.

b.
Some people win from inflation because of the following:
(i) Higher Profit:
Producer can charge high price because demand is also high.

(ii) Huge Investment:
Investor or Entrepreneurs can get high return from investment at the time of inflation because the price will be high.

(iii) Gain for the borrowers:
Inflation means a decrease in the value or purchasing power of money. If the rate of inflation is to be paid by the borrower is less than inflation rate, the borrower will gain. This is because the real value of borrower of the money returned by the borrower is actually less than that of the money borrowed earlier.

Some people lose from inflation because of the following:
High Price to consumer :
Consumers have to pay high price for the goods purchased.

Low profit margin to supplier :
Because cost of production rises which leads to rise in price. Supplier and Consumer are directly affected.
Difficult in Planning :
To do new investment it may need huge amount and can be difficult to plan for future being base on current inflation time.

Inequality in income :
Entrepreneur can earn high income but normal salaried person can less income so there may be in equal distribution of income.

C.
Q.NO.7
(a). A town council funds a new library is a Government Expenditure (G). In this case, public investment increases leads to increase in Government Expenditure and injection also increases.

(b). The Federal Government raises the tax free threshold is Consumption (C). In this case, increase in disposal income leads to increase in consumption and it is injection.

(c). Fewer tourists visit Australia is export (X) . In this case, decrease in export leads to leakage
(d). Consumers demand more domestically produced goods but total consumption remains constant leads to decrease in import (m.)
(e). People are purchasing bonds issued by the banks is Investment (I).

(f). Manufacturing firms are encouraging by lower interest rates to borrow to finance the building of new factories leads to increase in Investment (I).

(g). Consumers abroad are deterred by high prices for the Australia dollar from buying imports from Australia leads to increase in price which tends to decrease in export (X).

(h). Both taxation and government expenditure are reduced is Government Expenditure (G). In this case, decline in revenue leads to increase in Disposable Income and the Government Expenditure remains constant.

People decide to save more of their income is Consumption (C). In this case, decrease in consumption leads to leakage.

(j) Our trading partners abroad begin to recover from a recession is Export (X). In this case there is increase in export.

Q.No.9
(h) (i) The economy’s monetary base leads to increase in money supply and aggregate demand also increases but the reserve ratio will decrease.

(ii) Short-term monetary market interest rates leads to decrease in investment ratio.

(iv) (iii) Longer-term maturity interest rates leads to decrease in investment ratio.

Aggregate demand , economic activity and inflation leads to increase in price level and Reserve Domestic Product also increase tends to aggregate demand shifts right.

While the Bank Negara Malaysia sells foreign currency to convert into RM , the Bank Negara Malaysia have to pay in RM. So, the fund from this to lend will be less. Hence, monetary base decreased.

(J ) The increase in the Government expenditure (G) is known as expansionary Fiscal Policy. Similarly, The decrease in tax rate is also called expansionary Fiscal Policy. Also, the change in (?) tax rate will not have much impact like change in (?) G i.e. ?G . Moreover, the Tax reforms is also very complex for any economy for administrative prospective. Thus, the decrease in tax rate leads to increase in PG and also Disposable income will have increase in consumption and investment finally leads to Aggregate Demand to move forward. So, there is always spending multiplier impact greater than Tax multiplier.