Student's Economic Evaluation Assignment 1: Autumn 2019 Analysis

This economics assignment evaluates two infrastructure investment proposals (A and B) for Country X, analyzing their impact on GDP (nominal and real) from 2008 to 2023, considering GDP deflators. The student recommends Proposal B, citing its lower investment requirement. The assignment explores Keynesian versus neoclassical economic reasoning, the marginal propensity to save (MPS), and how unforeseen events like high inflation might alter the recommendation. The student calculates the MPS and determines the investment level at which they would be indifferent between the proposals. The solution includes calculations of Nominal and Real GDP with different scenarios and provides answers to questions related to the proposals and their economic implications. The assignment tests understanding of economic concepts, calculations and their application to real-world scenarios.

Name:
Student #:
49003 ECONOMIC EVALUATION
Assignment #1 (Autumn 2019)
Due date: 26 April 2019
ANSWER-TEMPLATE
1. Provide a summary of the economic performance of the country - in the Table below.
(7 Marks)
2008 2013 2018 2023
WITHOUT
INVESTMENT GDP Deflator 107% 100% 133% 121%
Nominal GDP 750 1100 1800 1700
Real GDP (2018 prices) 900 1450 1800 1850
WITH
INVESTMENT
A Real GDP (2018 prices)
1700
B Real GDP (2018 prices) 440
Notes: 1) Base year for GDP Deflators is 2013.
2) All entries in this table must be rounded-off to the nearest zeros, i.e., no decimal points.
2. Which proposal will you recommend? (3 Marks)
A B Either Neither
Why? Because _____The amount of investment for project B is low compared to project
A________________________________________________________
Assignment 1-A19 –Answer Template
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____________________________________________________ (no more than 10 words)
3. Is the proposal, in this assignment, to invest in infrastructure based on Keynesian or Neo-
classical reasoning? (3 Marks)
Keynesian Neo-classical Either Neither
Why? Neo-classical economists assume investment as a part of capital formation.
_____________________________________________________
____________________________________________________ (no more than 10 words)
4. What value of ‘Marginal Propensity to Save’ is implicit in your calculations for proposal B?
(3 Marks)
Please present your calculations here (just two steps of calculations)?
In 2023, average income $ 64000 bn; average saving = $- 5000 bn
When, GDP $440 bn savings (440-400) = $ 40 bn
(1150-400)= $750 bn
MPS= (750-40)/(1150-440) = 710/710 = 1
5. Will you recommendation change if, say, due to unforeseen Global Financial Crises, the
economy experiences very high inflation and - as a result – the GDP Deflator for 2023
becomes 300? (3 Marks)
Assignment 1-A19 –Answer Template
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1

Yes No
Why? Because ___________Inflation will increase price level and that will increase
investment for both proposal________________________________________________
____________________________________________________ (no more than 10 words)
6. Will your recommendation change if, for Proposal A, people increased their annual
consumption by exactly the same amount as increase in their annual incomes (as shown in
Table 1 of the assignment)? (3 Marks)
Yes No
Why? Because _______The value of MPC will be 1 and that will reduce the investment for
proposal A______________________________________________________
____________________________________________________ (no more than 10 words)
7. For what value of investment (currently investment is $40bn, expressed in 2013 prices) will
you become indifferent between recommending Proposal A or Proposal B?
(3 Marks)
$bn
Please present your calculations to support your answer.
(1700-40) = 1660 $ bn
Annexure
Assignment 1-A19 –Answer Template
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1660

Nominal GDP: This type of GDP measure represents the total value of all goods and services
that produced in a particular year in a particular economy in a monetary form. For this, total
produced unit is multiplied with the current price level.
For the year 2008:
A = 10*20 = 200
B = 10*15 = 150
C = 20*20 = 400
Nominal GDP for the year 2008 is: 200+150+400 = 750
For the year 2013:
A = 15*20 = 300
B = 20*10 = 200
C = 30*20 = 600
Nominal GDP for the year 2013 is: 300+200+600 = 1100
For the year 2018:
A = 20*30 = 600
B = 25*20 = 500
C = 35*20 = 700
Nominal GDP for the year 2018 is: 600+500+700 = 1800
For the year 2023:
A = 25*20 = 500
B = 20*25 = 500
C = 35*20 = 700
Nominal GDP for the year 2023 is: 500+500+700 = 1700
Real GDP: Real GDP gives a measure that is inflation-adjusted. This measure shows the value
of entire goods and services that a country produces in terms of a base year prices
To calculate GDP deflator the base year for real GDP is 2018.
For the year 2008:
A = 10*30 = 300
B = 10*20 = 200
C = 20*20 = 400
Real GDP for the year 2008 is: 300+200+400 = 900
For the year 2013:
A = 15*30= 450
B = 20*20= 400
C = 30*20 = 600
Real GDP for the year 2013 is: 450+400+600 = 1450
For the year 2023:
A = 25*30= 750
B = 20*20= 400
C = 35*20= 700
Real GDP for the year 2023 is: 750+400+700= 1850
Base year 2013:
For the year 2008:
A = 10*20 = 200
B = 10*10 = 100
C = 20*20 = 400
Real GDP for the year 2008 is: 200+100+400 = 700
For the year 2018:
A = 20*20 = 400
B = 25*10 = 250
C = 35*20 = 700
Real GDP for the year 2018 is: 400+250+700 = 1350
For the year 2023:
Assignment 1-A19 –Answer Template

A = 25*20= 500
B = 20*10= 200
C = 35*20= 700
Real GDP for the year 2023 is: 500+200+700=1400
GDP deflator represents the measure of price inflation in an economy. The formula is:
(Nominal GDP/ Real GDP)*100
2008: (750/700)*100 = 107%
2013: (1100/1100)*100 = 100%
2018: (1800/1350)*100 = 133%
2023: (1700/1400)*100 = 121%
Year Average Average Average Savings
Disposable
Income
Consumption
1 60,000 60,000 0
2 61,000 61,500 -500
3 62,000 63,500 -1500
4 63,000 66,000 -3000
5 64,000 69,000 -5000
Investment multiplier = 1/ (1-MPC)
MPC = (69000-66000)/ (64000-63000) = 3000/1000 = 3
1/ (1-3) = -0.5
Investment for proposal A in 2023 = 1700 + (-0.5) = 1699.5
For proposal B, the GDP in 2023 is:
1100- (60+200+200+200) = $440 bn
Investment for proposal B in 2023 = 440+ (-0.5) = 439.5
Assignment 1-A19 –Answer Template