Economic Evaluation Assignment 1: Performance Analysis, Autumn 2018

This economics assignment evaluates the economic performance of a country based on provided data, analyzing nominal GDP, real GDP, and GDP deflators under different investment proposals. The assignment explores the impact of investment on economic indicators, including the use of investment multipliers. It examines the implications of hyperinflation, changes in base years for real GDP calculations, and the marginal propensity to consume. Furthermore, the solution determines whether the investment strategy aligns with Keynesian or Neo-classical reasoning and assesses how unforeseen economic events, such as deflation or changes in savings behavior, would affect the recommendations. The analysis provides detailed calculations and justifications for each recommendation, making this a comprehensive resource for understanding economic evaluation and its practical applications.

Name:
Student #:
49003 ECONOMIC EVALUATION
Assignment #1 (Autumn 2018)
ANSWER-SHEET
1. Provide a summary of the economic performance of the country - in the Table below.
(5 Marks)
2008 2013 2018 2023
WITHOUT
INVESTMENT Nominal GDP 759 574 902 585
GDP Deflator 115 100 122 100
Real (2018 prices) 805 926 739 714
WITH
INVESTMENT
A Real (2018 prices)
722 695 679 623
B Real (2018 prices) Insufficien
t data-
Insufficient
data
Insufficient
data
691
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? (2 Marks)
A B Either Neither
Why? Because for both real GDP in 2023 is less compared to without investment.
________________________________________________________
____________________________________________________ (no more than 10 words)
3. Will your recommendation change if Proposal A results in hyper-inflation? (2 Marks)
Yes No
Why? Because _______Price inflation further reduces effect of investment
multiplier______________________________________________________
Assignment 1-A18 –Answer Template - Revised
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____________________________________________________ (no more than 10 words)
4. Which proposal will you recommend on the basis of GDP deflators? (2 Marks)
A B Neither
Why? Because ____computation of real GDP based on GDP deflators results in a smaller
real GDP under both proposal
_________________________________________________________
____________________________________________________ (no more than 10 words)
5. Will your recommendation change if 2023 is used as the base year for determining Real
GDPs instead of 2018 (as is presently the case)? (2 Marks)
Yes No
Why? Because _ real GDP calculated from taking 2023 is still lower than that without
investment (566 <714)___________________________________________________
____________________________________________________ (no more than 10 words)
6. How much investment (expressed in 2018 dollars) will be needed in (currently investment
is $30bn, expressed in 2013 prices) in order to make Proposal A better than Proposal B?
(2 Marks)
$42bn
$58bn
$73bn
None of the above
Why? Because ____of negative multiplier effect increase in investment further reduces
output________________________________________________________
____________________________________________________ (no more than 10 words)
7. What value of ‘Marginal Propensity to Consume’ is implicit in your calculations for
proposal B? (2 Marks)
Please present your calculations here (just two steps of calculations)?
( 691−714 )= 30∗1
1−MPC
Assignment 1-A18 –Answer Template - Revised
0.3
0
√
√
√

¿ ,−23= 30∗1
1−MPC
¿ , 1−MPC=1.30
¿ , MPC=1−1.30−0.30
8. Is the proposal, in this assignment, to invest in infrastructure based on Keynesian or Neo-
classical reasoning? (2 Marks)
Keynesian Neo-classical Either Neither
Why? Because _____in the economy there is equal or not equal involvement of private
sector or government. _____________________________________
___________________
____________________________________________________ (no more than 10 words)
9. Will you recommendation change if, say, due to unforeseen Global Financial Crises, the
economy experiences severe deflation and - as a result – the GDP Deflator for 2023 gets
reduced to 10? (2 Marks)
Yes No
Why? Because _____GDP still less than without investment scenario.
________________________________________________________
____________________________________________________ (no more than 10 words)
10. Will your recommendation change if, for Proposal A, people save every dollar of the yearly
increase in their incomes as shown in Table 1 of the assignment? (2 Marks)
Yes No
Why? Because ______MPC will be less than 1. Positive multiplier effect.
____________________________________________________
____________________________________________________ (no more than 10 words)
In addition to the above, upto 2 marks could be awarded for succinct and cogent answers to
various questions and for staying within the word/page limits.
Assignment 1-A18 –Answer Template - Revised
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ANNEXURE
Assignment 1-A18 –Answer Template - Revised

Answer 1
The national income accounting theory, the relation between nominal GDP, real GDP and GDP
deflator is obtained as
Real GDP= Nominal GDP
GDP deflator ∗100
Therefore,
GDP deflator= Nominal GDP
Real GDP ∗100
GDP deflator
GDP deflator= ∑ (QCurrent year∗PCurrent year)
∑ (QCurrent year¿ ¿ Pbase year )¿ *100
Base year for GDP deflator is given as 2013
GDP deflator for 2008= ( 10∗20 ) + ( 10∗16 ) +(20∗20)
( 10∗10 ) + ( 10∗16 ) +(20∗20) ×100
¿ 200+160+400
100+160+400 ×100=760
660 ×100
¿ 115.15 ≅ 115
GDP deflator for 2013= ( 10∗10 ) + ( 20∗16 ) +(30∗20)
( 10∗10 ) + ( 20∗16 ) +(30∗20) ×100
¿ 100+ 320+600
100+ 320+600 × 100= 1020
1020 ×100
¿ 100
GDP deflator for 2018= ( 15∗12 ) + ( 15∗18 )+(35∗25)
( 15∗10 ) + ( 15∗16 ) +(35∗20) ×100
¿ 180+270+875
150+240+700 × 100= 1325
1090 ×100
¿ 121.55 ≅ 122
GDP deflator for 2023= ( 20∗15 ) + ( 25∗24 ) +(20∗5)
( 20∗10 ) + ( 25∗16 ) +(20∗20) ×100
¿ 300+600+100
200+400+400 × 100= 1000
1000 ×100
¿ 100
2008
GDP = market value of goods and service -Indirect taxes +Subsidies
Market value of goods∧service=¿
( 20∗10 ) + ( 15∗10 )+ ( 5∗20 )+ ( 25∗6 ) + ( 20∗5 )
¿ 200+150+100+150+100
¿ 700
GDP of 2008 at 2013 prices = 700 -60 +20 = 660
Nominal GDP2008 ( 2008 prices )= GDP 2008 (2013 prices )∗Deflator 2008
Deflator2013
¿ 660∗115
100
¿ 75900
100 =759
Real GDP2008 ( 2018 prices ) = GDP 2008 ( 2008 prices )∗Deflator2018
Deflator2008
Assignment 1-A18 –Answer Template - Revised

¿ 759∗122
115
¿ 805.2 805
2013
GDP at 2018 prices=rent +wage+ capital cost +corporate profit
¿ $ 100+$ 300+$ 150+$ 150
¿ $ 700
Nominal GDP2013 ( 2013 prices )= GDP 2013 (2018 prices )∗Deflator 2013
Deflator2018
¿ 700∗100
122
¿ 7000
122 =573.77 574
Real GDP2013 ( 2018 prices ) = GDP 2013 ( 2013 prices )∗Deflator2018
Deflator2013
¿ 574∗122
100
¿ 700.28 700
2018
GDP at 2008 prices=consumption+investment +government expediture+net export
¿ 600+110+200−60
¿ 850
Nominal GDP2018 ( 2018 prices )= GDP 2018 (2008 prices )∗Deflator 2018
Deflator2008
¿ 850∗122
115
¿ 103700
115 =901.74 902
Real GDP2018 ( 2018 prices )= Nominal GDP
GDP deflator × 100
¿ 902
122 ×100=73934 739
2023
Consumption by all the three industry = 140+180+318 =608
Total industry consumption ( 2023 price ) = value 2023 ( 2018 prices )∗Deflator 2023
Deflator2018
¿ 638∗100
122 =522.95 523
Nominal GDP=Concumption+ Indirect taxes
¿ 523+62=585
Real GDP2023 ( 2018 prices ) = GDP 2023 ( 2023 prices )∗Deflator2018
Deflator2023
¿ 585∗122
100
¿ 713.7 714
Proposal A
Both the proposal A and B costs $30 bn (2013 prices). Investments will be undertaken in 2018.
The value of investment is then
Assignment 1-A18 –Answer Template - Revised

∆ I ( 2018 prices ) = ∆ I ( 2013 )∗Deflator2018
deflator2013
¿ 30∗122
100
¿ 36.6 37
Investment Multiplier
Average
Income
Average
saving
Average
Consumption
50000 0 50000
51000 -500 51500
52000 -1000 53000
53000 -1500 54500
54000 -2000 56000
MPC= ( averageconsumtion∈ year5−average consumption ∈ year1)
(average disposable income∈ year 5−average diposable income ∈ year 1)
¿ 56000−50000
54000−50000
¿ 6000
4000
¿ 1.5
Investmment multiplier = 1
1−MPC
¿ 1
1−1.5 =−2
Investment multiplier effect = 37*(-2) = -74
Nominal GDP in 2008 = 755 – 74 =681
Real GDP (2018 prices)= (681*122)/115 = 722
Nominal GDP in 2013 = 574– 74 =500
Real GDP (2018 prices )= (500*122)/100 = 695
Nominal GDP in 2018 = 902-74 =828
Real GDP (2018 prices) =(828/122) *100 = 679
Nominal GDP in 2023 = 585 – 74 =511
Real GDP (2018 prices = (511*122)/100 = 623
Proposal B
GDP at 2013 prices=Market value of output−value addition – Indirect taxes
¿ 900−200−134
¿ 566
Nominal GDP2023 ( 2018 prices )= GDP 2023 (2013 prices )∗Deflator 2023
Deflator2013
¿ 566∗100
100
¿ 566
Assignment 1-A18 –Answer Template - Revised

Real GDP2023 ( 2018 prices ) = GDP 2023 ( 2023 prices )∗Deflator2018
Deflator2023
¿ 566∗122
100
¿ 690.52 691
Answer 5
Proposal A
Real GDP at 2023 prices = (511/100)*100 = 511
Proposal B
Real GDP = (566/100)*100 = 566
Answer 7
∆ Y =∆ I × 1
1−MPC
( 691−714 )= 30∗1
1−MPC
¿ ,−23= 30∗1
1−MPC
¿ , 1−MPC=1.30
¿ , MPC=1−1.30−0.30
Answer 9
Nominal GDP2023 ( 2018 prices )= GDP 2023 (2013 prices )∗Deflator 2023
Deflator2013
¿ 566∗10
100
¿ 56.6 57
Real GDP2023 ( 2018 prices ) = GDP 2023 ( 2023 prices )∗Deflator2018
Deflator2023
¿ 57∗122
10
¿ 695.4 69 4
Real GDP with value of GDP deflator as 10 is less than GDP under scenario without
investment.
Assignment 1-A18 –Answer Template - Revised