Understanding Economic Evaluation

This assignment delves into the concept of economic evaluation. It begins by calculating the GDP deflator for a given base year and explores its implications. The assignment further examines the impact of investment decisions using two proposals (A and B) with calculations based on consumption, GDP, and the investment multiplier. It also analyzes the effect of selling goods to final users on nominal GDP and real GDP. Finally, it discusses the relationship between marginal propensity to consume (MPC), average income, and savings.

Running head: ECONOMIC EVALUATION
Economic Evaluation
Name of the Student
Name of the University
Author note

1
ECONOMIC EVALUATION
From the theory of national income accounting,
Real GDP= Nominal GDP
GDP deflator ∗100
GDP deflator= Nominal GDP
Real GDP ∗100
Calculation for GDP deflator
GDP deflator = ∑ (QCurrent year∗PCurrent year )
∑ (QCurrent year ¿ ¿ Pbase year)¿ *100
Given base year for GDP deflator as 2017,
GDP defl ator for 2007= ( 10∗20 )+ (10∗30 ) +(20∗20)
( 10∗30 ) + ( 10∗20 ) +(20∗20) * 100 ¿ 900
900∗100 = 100
GDP deflator for 2012= ( 15∗20 )+ ( 20∗10 )+(3 0∗20)
( 15∗30 )+ ( 20∗20 )+(3 0∗20)
¿ 1100
1450∗100
¿ 75.86 ≅ 76
GDPdeflator for 2017= ( 20∗30 ) + ( 25∗20 )+(35∗20)
( 20∗30 ) + ( 25∗20 )+(35∗20)∗100
¿ 1800
1800∗100
¿ 100

2
ECONOMIC EVALUATION
GDP defaltor for 2022= ( 5∗30 )+ ( 20∗35 )+ ( 35∗20 )
( 5∗30 )+ ( 20∗20 )+ ( 35∗20 )∗100
¿ 1550
1250∗100
¿ 124
2007
For the upper loop, data is not sufficient to calculate gross investment.
For the lower loop, data for cost of capital is missing.
2012
GDP2007=w +i+ r+ p
¿ 250+200+200+ 300=850
Nominal GDP2012 ( 2012 prices ) =GDP 2012 ( 2007 prices )∗Deflator 2012
Deflator2007
¿ 850∗76
100
¿ 646
Real GDP2012 ( 2017 prices ) = GDP 2012 ( 2012 prices )∗Deflator2017
Deflator2012
¿ 646∗100
76
¿ 850

3
ECONOMIC EVALUATION
2017
GDP=C+ I +G+ ( X−M )
C = 800, I= 200, G =200, ( X-M) = -100
Therefore, GDP2012=800+200+200−100=1100
Nominal GDP2017 ( 2017 prices ) = GDP2017 ( 2012 prices )∗GDP daflator 2017
GDP deflator2012
¿ 1100∗100
76
¿ 1447.34 ≅ 1447
Real GDP2017 ( 2017 prices ) =GDP 2017 ( 2017 prices )∗Deflator2017
Deflator2017
¿ 1477
2022
GDP=Market values of final goods + Indirect tax−subsidies
Values of output sold to the final consumers are included in GDP calculation. For industry III,
there are no final goods sold to the market. Therefore, final goods value of industry I and
industry II are considered.
Total value of goods = 600+ 300= 900.
Indirect tax = 100

4
ECONOMIC EVALUATION
Subsidies = 60
GDP2012 prices=900+100−60
¿ 940
Nominal GDP2022 ( 2022 prices ) = Nominal GDP 2022 ( 2012 prices )∗Deflator2022
deflator2012
¿ 940∗124
76
¿ 1533.68 ≅ 153 4
Real GDP2022 ( 2017 )=GDP 2022 ( 2022 prices )∗deflator2017
Deflator2022
¿ 1534∗100
124
¿ 1237.097 ≅ 1237
With investment
Proposal A
Both the proposals are to be of 20 bn (2012 prices). Investments are likely to be done in 2017.
Therefore, ∆ I ( 2017 prices ) = ∆ I ( 2012 )∗Deflator2017
deflator2012
¿ 20∗100
76
¿ 26.32 ≅ 26

5
ECONOMIC EVALUATION
The table below used for calculation of investment multiplier
Average
income Average Saving
Average
consumption
60000 0 60000
61000 -500 61500
62000 -1000 63000
63000 -1500 64500
64000 -2000 66000
MPC= ( averageconsumtion∈ year5−average consumption ∈ year1)
(average disposable income∈ year 5−average diposable income ∈ year 1)
¿ 66000−60000
64000−60000
¿ 6000
4000
¿ 1.5
Investmment multiplier = 1
1−MPC
¿ 1
1−1.5 =−2

6
ECONOMIC EVALUATION
∆ Y ( 2017 prices ) =∆ I ( 2017 prices )∗I nvestment multiplier
¿ 26∗(−2 )=−52
Real GDP ( 2017 prices )=1237−52=1185
Proposal B
Total Consumption for the year 2022 (2022 prices) = 1655- 400= 1255
GDP 2022 (2022 prices) = Consumption + indirect taxes = 1255 + 100= 1355
Nominal GDP2022 ( 2022 prices ) =1355
Real GDP2022 ( 2017 prices ) = GDP 2022 ( 2022 prices )∗deflator2017
deflator2022
¿ 1355∗100
124
¿ 1092.74 ≅ 1093
3) If $150bn is sold to final users then it would be included in GDP calculation.
Nominal GDP = (1355+150)= 1505
Real GDP=1505∗100
124

7
ECONOMIC EVALUATION
¿ 1213.71≅ 1214
5) Real GDP in 2022 with deflation,
Real GDP=1355∗100
10
¿ 13550
6)
Average income
Average
Saving Consumption MPC
60000 0 60000 0.5
61000 500 60500
62000 1000 61000
63000 1500 61500
64000 2000 62000
MPC= 0.5
Investment multiplier= 1
1−0.5 =2
∆ Y =26∗2= 52
Real GDP2022 ( 2017 prices )=1237+52=1289
8) In GDP is to be increased by 200 bn then ΔY = 200
∆ I =∆ Y ( 1−MPC )

8
ECONOMIC EVALUATION
¿ 200(1−1.5) = -100