Analysis of Economic Proposals: Assignment 1, Autumn 2018

This assignment focuses on the economic evaluation of a country's performance under different investment proposals. It presents data on nominal GDP, GDP deflators, and real GDP for various years, both with and without investment. The student analyzes the impact of investment on economic indicators, recommending the best proposal based on real GDP comparisons. The assignment includes calculations for GDP deflators and investment multipliers, and explores how hyperinflation, deflation, and changes in the base year for real GDP calculations affect the recommendations. The student also addresses the underlying economic reasoning (Keynesian or Neo-classical) and the effects of changes in savings rates. The solution provides a detailed breakdown of the calculations and rationale behind the recommendations, demonstrating an understanding of economic concepts and their practical application. The assignment concludes with a final recommendation based on the different scenarios presented.

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) 805 700 739 714
WITH
INVESTMENT
A Real (2018 prices)
722 695 679 623
B Real (2018 prices)
Insufficient
information
Insufficient
informatio
n
Insufficient
information
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 Proposal A , 623 <714 For Proposal B, 714
>691_____________________________________________
____________________________________________________ (no more than 10 words)
3. Will your recommendation change if Proposal A results in hyper-inflation? (2 Marks)
Yes No
Why? Because _________Hyper-inflation has detrimental effect on 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 ________Based on the GDP deflators on respective years an even smaller
real GDP is obtained. _____________________________________________________
____________________________________________________ (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 in 2023 remain still lower than scenario without
investment_______________________________________________________
____________________________________________________ (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 ___MPC>1, investment multiplier has an inverse effect on GDP
__________________________________________________________
____________________________________________________ (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 _____no evidences given on equal or unequal involvement of government
___and private sector_____________________________________________________
____________________________________________________ (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 _____Investment through both the proposal fail to increases real GDP
_______________________________________________________
____________________________________________________ (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 ____With a positive propensity to save the multiplier effect is positive.
_________________________________________________________
____________________________________________________ (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
Answer 1
From national income accounting
Real GDP= Nominal GDP
GDP deflator ∗100
Therefore,
GDP deflator= Nominal GDP
Real GDP ∗100
Calculation of GDP deflator
GDP deflator= ∑ (QCurrent year∗PCurrent year)
∑ (QCurrent year¿ ¿ Pbase year)× 100 ¿
Given the base year for GDP deflator is 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 2018,
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
Calculation for GDP
2008
Total market value of the output =
( 20∗10 ) + ( 15∗10 )+ ( 5∗20 )+ ( 25∗6 ) + ( 20∗5 )
¿ 200+150+100+150+100
¿ 700
GDP at market price = Market value of output – net indirect tax
Assignment 1-A18 –Answer Template - Revised

=700 -60 +20 = 660
Nominal GDP2008=GDP 2008 ( 2013 prices )∗Deflator 2008
Deflator2013
¿ 660∗115
100 =759
Real GDP2008 ( 2018 prices ) = GDP 2008 ( 2008 prices )∗Deflator2018
Deflator2008
¿ 759∗122
115
¿ 805.2 805
2013
GDP (2018 prices) =
rent + wage+capital cost+ corporate profit
¿ $ 100+$ 300+$ 150+$ 150
¿ $ 700
Nominal GDP
GDP2013 ( 2018 prices )∗Deflator 2013
Deflator2018
¿ 700∗100
122
¿ 70000
122 =573.77 574
Real GDP (2018 prices)
GDP2013 ( 2013 prices )∗Deflator2018
Deflator2013
¿ 574∗122
100
¿ 700.28 700
2018
GDP (2008 prices) = consumption +investment +government expediture+ net export
¿ 600+110+200−60
¿ 850
Nominal GDP2018=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=739.34 739
2023
Consumption by the three industry in the economy = 140+180+318 =638
Total industry consumption ( 2023 price ) = value 2023 ( 2018 prices )∗Deflator 2023
Deflator2018
¿ 638∗100
122 =522.95 523
Nominal GDP = Consumption of industries + indirect taxes = 523 + 62 = 585
Assignment 1-A18 –Answer Template - Revised

Real GDP2023 ( 2018 prices ) = GDP 2023 ( 2023 prices )∗Deflator2018
Deflator2023
¿ 585∗122
100
¿ 713.7 714
With Investment
Proposal A
Proposed Investment =$30 bn (2013 prices)
∆ 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
Marginal propensity ¿ consume=Change∈Consmption
Change∈income
¿ 1500
1000
¿ 1.5
Investmment multiplier = 1
1−MPC
¿ 1
1−1.5 =−2
Multiplicative effect of investment = 37 *(-2) = -74
GDP in 2008
Nominal GDP = 755 – 74 =681
Real GDP=681∗122
115 =722.45 722
GDP in 2013
Nominal GDP = 574 – 74 = 570
Real GDP=570∗122
100 =695.4 695
GDP in 2018
Nominal GDP = 902 – 74 = 828
Real GDP= 828
122 ×100=678.69 679
GDP in 2023
Nominal GDP = 585 – 74 = 511
Real GDP=511∗122
100 =623.42 623
Proposal B
2023
GDP (2013 prices) = Total value of Output – value addition –Indirect tax
Assignment 1-A18 –Answer Template - Revised

=900 -200 -134 =566
Nominal GDP2023=GDP 2023 ( 2013 prices )∗Deflator 2023
Deflator2013
¿ 566∗100
100
¿ 566
Real GDP2023 ( 2018 prices ) = GDP 2023 ( 2023 prices )∗Deflator2018
Deflator2023
¿ 566∗122
100
¿ 690.52 691
Answer 5
Proposal A
Real GDP∈2023= 511∗100
100 =511< 714
Proposal B
Real GDP in 2023 (2023 prices) = (566/100) *100 = 566<714
Answer 7
( 691−714 )= 30∗1
1−MPC
¿ ,−23= 30∗1
1−MPC
¿ , 1−MPC=1.30
¿ , MPC=1−1.30=0.30
Answer 9
Proposal B
Nominal GDP (2023 prices) = (566*10)/100 = 56.6 57
Real GDP in 2023 (2018 prices) = (57/10) *122 = 695.4<714 (without investment)
Assignment 1-A18 –Answer Template - Revised