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Solution 1:
a) GDP using income method = Returns to labor + Firm profits + other factor rentals
= 2651 + 1687 + 482 = 4820
b) GDP using expenditure method at market prices = Consumption + Investment + Government
Expenditure + (Export - Import)
= Household Consumption Expenditure +Government Consumption Expenditure + Consumption
in fixed capital +Gross private fixed capital formation + Government investment expenditure +
(Export of goods and services - Import of goods and services)
= 3115 + 585 + 320 +785 + 210 + (690-565) = 5140
c) Gross National Expenditure (GNE) = GDP - (Export -Import)
= 5140 - ( 690 - 565) = 5140 - 125 = 5015
d) NDP = GDP - Depreciation = GDP - consumption in fixed capital = 5140 - 320 = 4820
e) In NDP the country is able to replace the loss of capital stock through depreciation. Therefore,
NDP is a better measure of economic performance than GDP.
(f) To calcualte GNP : Y = C + I + G + X + Z. where
Y means GNP = Consumption + Investment + Government + X (net exports, or imports minus
exports) + Z (net income earned by domestic residents from overseas investments - net income
earned by foreign residents from domestic investments.)
C = Consumption of fixed capital+ Household consumption expenditure

C = 3435
I = 210
G = 585
X = 125
Z = - 34
GNP = 3435 + 210 + 585 + 125 -34 = 4321
(g) NNP = GNP - Depreciation
here we do not any depreciation given, so NNP is same as GNP.
(h) Current Account Balance = (X-M) + NI + NT
 X means the export of goods and M means the import of goods = 125
 NI means net income = 34
 NT means net current transfers
Current account Balance = 125 + 34 = 159
(i) GNS = Gross national disposable income - final consumption expenditure
National disposable income = National income (4321)+ Net indirect taxes(0) + Net current
transfers from rest of the world(-34)
= 4321 - 34 = 4287
final consumption expenditure = Government consumption expenditure + Household
consumption expenditure

= 3700
GNS = 4287 - 3700 = 587
j) National income or GDP has two sides following the way it is calculated. These are income
method and expenditure method. Income method measures GDP by adding the income heads,
expenditure method calculates GDP by adding the expenditure heads. First we calculate the total
income generated using the income method.
Income = returns to labour + firm profits + other factor rentals = 4820
Next we calculate total expenditure by adding the heads of expenditure. And they are broadly
categorised as
i. Private Consumption expenditure (by the household) = 3115
ii. Private Investment expenditure = gross fixed capital formation = 785
iii. Government expenditure (consumption + investment) = 585 + 210 = 795
iv. Export – imports = 690 – 565 = 125
S = I + (G – T) + (X – M) = 785 + (795 – 17) + 125 = 1688.
Therefore, the value of national savings is $ 1688 billion.
k) I presume that MPCd refers to the domestic marginal propensity to consume. Marginal
propensity to consume measure how much consumption increases if income increase by $1. Here
income increases by $(4873 – 4820) = $53 billion. Hence, given that MPCd is 0.63, the increase
in consumption will be by an amount of 0.63 × $53 = $33.39 billion. The new level of domestic
consumption will be 3115 + 33.39 = $3148.39 billion

l) If we assume the simplest aggregate demand model where only consumption is a function of
income and rest all are lump sum amounts, then expenditure side of the above model can be
rewritten as
Y = C0 + c (Y) + I0 + G0 + NX0 where Y refers to income or GDP, NX refers to net exports
and the subscript 0 refers to a constant or given value. C (Y) represents consumption as a
function of Y where c/, the first differentiation of c concerning Y is positive, implying when
income increases by $1, marginal propensity to consume also increases. MPCd is given as 0.63,
which implies that at the aggregate level if income increases by $1, consumption increases by
$0.63.
A total differentiation of the above equation gives us
dY = dC0 + c/dY + dI0 + dG0 + dNX0
or
(1 – c/) dY = dC0+ dI0 + dG0 + dNX0
Or
dY = [dC0+ dI0 + dG0 + dNX0] (1)
In the above expression is called the multiplier. If one or more of the constant term in the
RHS increases, then income increases by this amount. Since c/ is a positive fraction, the
multiplier is greater than one, and hence, the increase in income will be more than the increase in
the constant term.

In the given problem, following changes are mentioned: dNX0 = 4 billion, dI0 = - 3 billion, net
change in government expenditure is $1 billion, therefore, dG0 = 1 billion and there is no change
in the basic consumption expenditure or dC0 = 0.
Therefore, in equation the term in the parenthesis = 4 – 3 + 1 = 2.
The multiplier value for c/ = 0.63 is 2.70 (approximately).
Therefore, change in GDP or dY = 2 × 2.70 = 5.40.
Hence, the new value of GDP will be $(4820 + 5.40) = $ 4825.4 billion.

Solution 2:
a)
 A windscreen purchased by a motor vehicle spare parts supplier : final goods and
services as it is being purchased by the supplier to be sold to the final consumer of the
goods which are vehicle owners.
 A new bulldozer to be used by a construction company : final goods and
services because it has been purchased by the construction company for the capital
formation or investment.
 A household cleaning service purchased by a family from a domestic cleaning service
company : final goods and services as the family is the final consumer of the services.
 Coking coal : intermediate goods and services because it is used for producing final
goods like electricity.
b) Gross domestic product (GDP) is the total value of the final goods and services that have
been produced and sold in a country during a year. So, it does not include the value of the
goods that have been produced but not sold. So, in the present case, the nation’s GDP
will be $750 billion.
c) Goods that are purchased by firms as part of capital formation or investment are included
as final goods irrespective of their use. So, even though the new truck sold for use by a transport
company is being used for transporting the final goods, its value should be included while
calculating the GDP.

Solution 3:
In figure 1, AS and AD are initial Aggregate supply and Aggregate demand, respectively. Now
an increase in the cost of production shifts short run Aggregate supply to SRASo. As result
prices rise from p to p1. Since it happens due to cost increase this type of inflation is known as
cost-push inflation
Demand-pull inflation is shown in figure 2.Here prices rise from po to p1 because Aggregate
demand rises from AD to AD1.
Cost push inflation occurs due to an increase in taxes or an increase in prices of some inputs like
crude oil
Demand-pull inflation occurs due to higher wages of labour which thus demand more goods and
services, increase in Govt expenditure

Solution 7:
a)Won't increase. The selling of government securities to banks would not increase, rather
decrease the money supply, as the money circulating in the economy through the bank would
decrease.
b)Increase. A fall in interest rates would increase the money supply as the consumers' incentive
to store the money with the bank decrease due to lower interest rates, and they will try to keep
money more liquid.
c)No change in money supply, as the government is spending the money it is borrowing from the
bank, it is being circulated in the economy.
d)Increases. The money supply increases in this case as the government injects money into the
economy by purchasing securities from the bank.
e)Reduces. To reduce the rate of inflation, the interest rate should rise, thus reducing money
supply in the economy.

Soln 8:
(a)DVD recorders imported into the nation from Japan – Import of goods
(b) Insurance cover purchased in the nation by overseas residents – Exports of services
(c) The nation gives overseas aid to a developing country – Other income outflows
(d) A US car company sets up a factory in the nation - Capital transfers to the nation from
overseas
(e) Some of the nation’s residents take a holiday in Bali - Other income outflows
(f) Interest earned by the nation’s residents on overseas assets - The nation’s investments
overseas
(g) Running down the stock of foreign exchange in the Central Bank of the nation - Drawing on
reserves
(h) Migrants to the nation transferring property to the nation - Other income inflows
(i) New deposits made in banks in the nation by overseas residents - Short-term financial inflows
(j) The nation’s palm oil is sold in the United Kingdom - Exports of goods