Solution

a.   Using the provided information, fill in the following table.

b.   What is the percentage change in nominal GDP from 2013 to 2014? Provide any formulas you use and show your work in calculating this answer.

Percentage change in a variable =

([New value of variable - Previous value of variable]/(Previous value of variable))* ( 100%)

Percentage change in nominal GDP from 2013 to 2014 = {[(Nominal GDP in 2014) - (Nominal GDP in 2013)]/(Nominal GDP in 2013)}*(100%)

Percentage change in nominal GDP from 2013 to 2014 = [(8866- 8000)/8000]* 100 = 10.83%

c.   What was the percentage change in nominal GDP from 2014 to 2015?

Percentage change in nominal GDP from 2014 to 2015 = [(9650- 8866)/8866]*100 = 8.84%

d.   Using 2013 as the base year, fill in the following table.

e.   What was the percentage change in real GDP from 2013 to 2014?

Percentage change in real GDP from 2013 to 2014 = [(8650-8000)/8000]*100 = 8.13%

f.   What was the percentage change in real GDP from 2014 to 2015?

Percentage change in real GDP from 2014 to 2015 = [(9070-8650)/8650]*100 = 4.86%

QUESTION 2

Income and Expenditure Methods

The table below shows the national income accounts for a hypothetical country, Metrica:

a)  What is the income-based estimate of Metrica’s GDP?

b)  What is the expenditure-based estimate?

c)  What is the value of the statistical discrepancy that is added to the lower estimate and subtracted from the higher estimate to find a single GDP value?

Solution

a) The income-based estimate of GDP = wages and salaries ($546 billion) + corporate income ($98 billion) + proprietors’ incomes and rents ($56 billion) + indirect taxes ($75 billion) + depreciation ($79 billion) = $854 billion.

b) The expenditure-based estimate of GDP = personal consumption ($490 billion) + gross investment ($157 billion) + government purchases (184 billion) + net exports [exports ($68 billion) − imports ($27 billion)] = $872 billion.

c) Given the $18 (= $872 − $854) billion difference between the income-based and expenditure-based GDP estimates in part a, half this amount ($9 billion) is added to the lower income-based estimate ($854 billion) and half this amount is subtracted from the higher expenditure-based estimate ($872 billion). The GDP value of $863 billion is found by adding the $9 billion statistical discrepancy to the income-based estimate of $854 billion and deducting $9 billion from the expenditure-based estimate of $872 billion.

QUESTION 3

Economic Systems

a)   Contrast how a market system and a command economy try to cope with economic scarcity.

Answer: A market system allows for the private ownership of resources and coordinates economic activity through market prices. Participants act in their own self-interest and seek to maximize satisfaction or profit through their own decisions regarding consumption or production. Goods and services are produced and resources are supplied by whoever is willing to do so. The result is competition and widely dispersed economic power.

The command economy is characterized by public ownership of nearly all property resources and economic decisions are made through central planning. The planning board, appointed by the government determines production goals for each enterprise. The division of output between capital and consumer goods is centrally decided based on the board’s long-term priorities.

b)  How does self-interest help achieve society’s economic goals? Why is there such a wide variety of desired goods and services in a market system? In what way are entrepreneurs and businesses at the helm of the economy but commanded by consumers?

Answer: The motive of self-interest gives direction and consistency to the economy. The primary driving force of the market system is self-interest. Entrepreneurs try to maximize their profits; property owners want the highest price for their resources; workers choose the job with the best wages, fringe benefits and working conditions. Consumers apportion their expenditures to maximize their utility, while seeking the lowest possible prices. As individuals express their free choice, the economy is directed to produce the most wanted goods at the lowest possible cost.

Each individual consumer will choose a variety of goods and services that in combination will maximize his/her satisfaction (utility). There is a wide variety