COEC121 Study Unit 2 Quiz-MEMO PDF

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Study Unit 2 Quiz Test your knowledge by answering the end-of-chapter questions in the textbook at the end of Chapter 21 as well as the following review questions:

SECTION A: Multiple Choice. Write ONLY the correct option/letter A-B on your answer sheet. a. Economists are interested in studying ___ GDP which reflects the ___ at ___ to indicate ___. b. nominal; value of output; base year prices; economic growth c. real; value of output; base year prices; the change in production d. nominal; current value of output; inflationary prices; purchasing power parity e. real; current value of output; nominal prices; economic growth f. The expenditure approach to GDP in South Africa will include: g. the value of Nene’s second-hand shoes bought from a thrift shop. h. MTN’s investment in Mozambique. i. the purchase of train carriages by PRASA. j.

John’s salary.

k. The income approach to GDP will include: l.

dividend payments received from JSE shares.

m. the depreciation of capital goods used in production. n. child grants paid to poor mothers. o. profits earned by informal traders. p. Potential GDP is the ___ level of output given the ___ levels

of resources and ___ inflation. q. minimum; future; stable r. average; current; tolerating s. average; future; avoiding t. maximum; current; avoiding u. If country A has a 3% GDP growth rate and country B has a 5% GDP growth rate, it is most likely that country B: v. has a higher standard of living than country A. w. suffers from more pollution than country A. x. is richer than country A. y. has reduced its unemployment rate more than country A. z. If a country experiences similar growth rates in both its population and its nominal GDP, then: aa. its living standard will increase. bb. it will import more. cc. it will export less. dd. its standard of living will decrease.

ee. Real GDP is only one measure used to reflect economic welfare. Which one of the following statements is false? ff. Developed countries have a negligible underground economy relative to their real GDP. gg. Developing countries’ household production is most likely larger than that of developed countries that outsource these services. hh. Developed countries are relatively larger polluters than developing countries. ii. A higher GDP does not always correlate with longer life expectancy.

jj. Suppose the total market value of all final goods and services produced in Country X in 2018 is $900 billion and the total market value of final goods and services sold is $850 billion. We can conclude that: a. GDP in 2018 is $850 billion b. GDP in 2018 is $900 billion c. GNP in 2018 is $850 billion d. inventories in 2018 fell by 50 billion.

9. If a nation’s real GDP increases from $100 billion to $106 billion and its population jump from 200 million to 212 million. The real GDP per capita will: a. increase by $50. b. Remain constant c. fall by 2 percent d. Rise by 6 percent. 10. The difference between nominal and real GDP is that: 1. real GDP is more accurate at measuring production quantities than nominal GDP. 2. nominal GDP looks at the potential output while real GDP looks at what was actually produced. 3. nominal GDP looks at basic goods while real GDP looks at tangible goods. 4. nominal GDP uses the prices in the specific year while real GDP uses the prices of a reference year .

Section B

GDP is used as a measure of macroeconomic performance. What, precisely, does it measure?

Refer to the circular flow diagram and assume it is drawn for South Africa. State the flows in which each of the following transactions would be entered.

a. A consumer purchases meat at a local butchery.

Real flow: Goods and services from Goods Market to Household Financial flow: Payment for goods and services from Household to Goods Market b. A grocery store acquires 1,000 rolls of toilet paper for later resale.

Real flow: Toilet paper from Firm to Goods Market Financial Flow: Payment for toilet paper from Goods Market to Firm c. A consumer saves 10% of his income at his bank.

Financial flow: Savings from Household to Financial Intermediary Financial Flow: Interest payments from Financial Intermediary to Household d. Tourists from Europe come to visit South Africa.

Financial Flow: Foreign currency inflow from the Foreign Sector to

South Africa e. A construction firm builds a new mall.

Real Flow: Services from the Factor Market to the Firm Financial Flow: Factor Income from the Firm to the Factor Market f. A couple from Durban go on honeymoon in Mauritius.

Financial Flow: Foreign currency outflow from South Africa to the Foreign Sector i. The municipality of Cape Town low-cost housing.

Real Flow: Low-cost housing from the Government to Households Financial Flow: Taxes from Households and Firms to the Government

2. Differentiate between the two methods used to determine the gross domestic product (GDP) of a country

Expenditure approach: GDP = Aggregate expenditure (AE) = C + I + G + (X – M) Income approach: GDP = Aggregate Income (Y) = Salaries and Wages plus Rental Income plus Profit plus Interest Income plus Dividends plus Indirect Taxes less Subsidies plus Depreciation

Looking at the simple circular flow diagram of how an economy works, it is evident that all incomes generated within an economy is equal to all expenditures. As a result, one can calculate the GDP of an economy with the use of the income or expenditure approaches. 3. Explain the difference between nominal and real GDP

4. Define a business cycle and explain the specific phases of this cycle

5. Consider the following production information of a hypothetical economy. This economy only produces two goods, cars and pineapples 2017

2018

(base year) Product

Quantity

Price

Quantity

Price

Cars

150

R10 000

170

R 12 000

Pineapples

500

R 12

700

R 13

a. Calculate the nominal GDP for both years. Comment on your findings

Nominal GDP is equal to the total value of production based on current prices: Nominal GDP2017 = (Pricecars x Quantitycars) + (Pricepineapples x Quantitypineapples) = (R10 000 x 150) + (R12 x 500) = R1 506 000 Nominal GDP2018 = (Pricecars x Quantitycars) + (Pricepineapples x Quantitypineapples) = (R12 000 x 170) + (R13 x 700) = R2 049 100 b. Calculate the real GDP for both years. Has the economy improved or deteriorated?

Real GDP is equal to the total value of production based on constant (base year) prices. Real GDP is equal to the nominal GDP in the base

year, which is 2017 in this case: Real GDP = Nominal GDP2017 = (Pricecars x Quantitycars) + (Pricepineapples x Quantitypineapples) = (R10 000 x 150) + (R12 x 500) = R1 506 000, as before Real GDP2018 = (Pricecars, 2017 x Quantitycars, 2018) + (Pricepineapples, 2017 x Quantitypineapples, 2018) = (R10 000 x 170) + (R12 x 700) = R1 708 400 Since the real GDP in 2018 is greater than in 2017, we can conclude that the economic growth was positive

Real GDP is equal to the total value of production based on the prices of a reference or base year. Since 2017 is the base year, the prices for 2018’s production will have to be based on 2017’s prices:

c. Derive the GDP deflator for 2017 and 2018 from your answers above

GDP deflator

=

x 100 x 100

GDP deflator2017 = =

x 100

= 100 (the deflator is always equal to 100 in the base year) x 100

GDP deflator2018 = =

x 100

= 119.9

d. Calculate the economic growth rate for this economy and determine how long it will take for this country’s real GDP to double

Economic growth rate

= =(

=(

- 1) x 100 - 1) x 100

= 13.4% Applying the rule of 70, it will take approximately = 5.22 years for the real GDP to double Applying the rule of 70, it will take approximately

= 5.22 years for the real

GDP to double

6. Assume the following information for country A (note that the income amounts are in terms of current prices) Income components of GDP

Amounts

(current 2017 prices)

(in US dollars, millions)

Profit

1934

Depreciation

370

Net Interest Income

-45

Rental Income

27

Indirect Taxes

574

Dividends

18

Subsidies

50

Salaries and Wages

3050

a. Calculate the net domestic income at factor cost of country A

Net domestic income @ factor cost = Salaries and wages + Net

interest income + Rental income + Profit = $3050 000 000 – $45 000 000 + $27 000 000 + $1 934 000 + $18 000 000 = $4 984 000 000

b. Calculate the net domestic income at market price of country A.

Net domestic income @ market price = Net domestic income @ factor cost + Indirect taxes – Subsidies = $4 984 000 000 + $574 000 000 – $50 000 000 = $5 508 000 000 c. Calculate the nominal GDP of country A for this particular year.

Nominal GDP = Net domestic income @ market price + Depreciation = $5 508 000 000 + $370 000 000 = $5 878 000 000

d. Assume that the GDP deflator is equal to 112. Calculate the real GDP for country A

Real GDP

=

x 100 x 100

=

= $5 248 214 286 e. Calculate the real GDP per capita for country A, assuming the population size is 550 700

Real GDP per capita

=

=

=$9530.07

kk. Consider the following economic indicators of some economy

Real GDP

2016

2017

2018

350.9

317.4

294.8

54.15

55.01

55.91

(billions of US dollar) Population (millions of people)

a. Calculate the annual economic growth rate between 2016 and 2017 (assume that 2015 is the reference year) Ans: = -9.55% b. Calculate the annual economic growth rate between 2017 and 2018 Ans= -

7.12% c Given your answers in a) and b), indicate where the economy is on the business cycle?

Since the economic growth rate has been negative in both 2015 and 2016, we can conclude that this country is experiencing an economic contraction, as depicted by a downswing on the business cycle d. Calculate the per capita income in 2017, 2018 and 2019. Comment on the change in the standard of living

Real GDP per capita2014 = =

=$6480.15

Real GDP per capita2015 =

=

=$5769.86 Real GDP per capita2016 = =

=$5272.76 The standard of living has deteriorated as can be seen from the decline in the per capita income of this country. This deterioration can be attributed by two factors: a fall in real GDP from 2014 to 2016; and a rise is the population size from 2014 to 2016. Thus, the lower GDP has to be ‘split up’ between a greater population, therefore the lower GDP per capita overall. Note that per capita income is only an average and the overall standard of living depends on the distribution of income too.

7. Study the table below that lists some macroeconomic data for country x in 2018 and 2019. Variables

2018 (base year)

2019

2020

Operational

500 billion

634 billion

706 billion

1286 billion

1304 billion

1503 billion

1000 billion

1134 billion

1223 billion

Net exports

-25 billion

36 billion

54 billion

Government

635 billion

562 billion

734 billion

365 billion

456 billion

553 billion

surplus Consumption expenditure Compensation for employee

spending Investment

GDP deflator

100

120

140

a. Calculate country X’s nominal GDP for 2018 and 2019. Solution: 2018 GDP=C+I+G+(X-Z) = 1286 + 365 + 635 – 25 = 2261 billion 2019 GDP = C + I + G + ( X-Z) = 1304 + 456 + 562 + 36 = 2358 billion b. What approach have you used in calculating GDP value in 1. Justify your answer. Solution: The expenditure approach i.e C+I+G+(X-Z) c. Calculate the value of real GDP for 2019. Solution Real GDP in 2019 = nominal GDP in 2019 /GDP deflator X 100 = 1965 d. Calculate the value of the economic growth rate between 2018 and 2019. Solution (Real GDP in 2019 – real GDP 2018 ) / real GDP in 2018 X 100 = -13.09 %...