Name: MOHAMMAD ARSALAN FAYAZ

Student #: 12734253

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

Indeterminate 581 910 598
Nominal GDP
INVESTMENT
WITHOUT

115 100 122 100

GDP Deflator

Indeterminate 700 910 712

Real (2018 prices)

Indeterminate 700 910 639

INVESTMENT

A Real (2018 prices)

WITH

Indeterminate 700 910 993

B Real (2018 prices)

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 Proposal B has higher real GDP than Proposal A.(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 leads to higher GDP deflator as Proposal A is calculated in

2018 prices. (no more than 10 words)

Assignment 1-A18 –Answer Template - Revised

4. Which proposal will you recommend on the basis of GDP deflators? (2 Marks)

A B  Neither

Why? Because GDP deflator cannot be used as the base to calculate the growth. (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 negative multiplier effect on proposal A will keep its GDP value lower than
that of proposal B. (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 in proposal A investment has negative multiplier effect._ (no more than 10
words)

7. What value of ‘Marginal Propensity to Consume’ is implicit in your calculations for

proposal B? (2 Marks)

0.9

Please present your calculations here (just two steps of calculations)?

GDP 2023 Proposal A (with investment) = 639

GDP 2023 Proposal B (with investment) = 993
ΔY = 993-639 = 354
Δ I = 36.6
1
ΔY = Δ I * (1−𝑀𝑃𝐶 )
MPC = 0.9

Assignment 1-A18 –Answer Template - Revised

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 government uses Keynesian or Neo-Classical in Joint public and private
sectors for investment implementation. (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 of proposal A is still lower than proposal B even if the deflator is
reduced to 10. (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 saving every 1 dollar will keep multiplier effect as 1, hence proposal B will
still be higher than proposal A. (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

 ANNEXURE

Q1,2,3,4
𝛴𝑄,𝑃 (𝑋 𝑌𝑒𝑎𝑟)
GDP Deflator (X-Year) = 𝛴𝑄,𝑃( 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟) ∗ 100

GDP Deflator (2013; Base Year) = 100

𝛴𝑄,𝑃 (2008) 10∗20+10∗16+20∗20
GDP Deflator (2008) = 𝛴𝑄,𝑃( 2013) ∗ 100 = 10∗10+10∗16+20∗20 ∗ 100 = 115
𝛴𝑄,𝑃 (2018) 15∗12+15∗18+35∗25
GDP Deflator (2018) = ∗ 100 = 15∗10+15∗16+35∗20 ∗ 100 = 122
𝛴𝑄,𝑃(2013)
𝛴𝑄,𝑃 (2023) 20∗15+25∗24+20∗5
GDP Deflator (2023) = 𝛴𝑄,𝑃( 2013) ∗ 100 = 20∗10+25∗16+20∗20 ∗ 100 = 100

*2008
Flow of Product Approach:
GDP (2013 Prices) = C + G + Ig + (X-M)
C = (20*10+15*10+5*20+25*6+20*5) =700
Ig = I net + Depreciation Value = 150 +50 = 200
X-M = 0
G = Not Given
GDP (2013 Prices) = C (700) + G (Not Given) + Ig (200) + (X-M) (0)
Not enough information to compute the answer.

*2013
Flow of Product Approach:
GDP (2018 Prices) = C + G + Ig + (X-M)
C = 500
G = 100
Ig = 150+50 =200
X-M = -100
GDP 2013 (2018 Prices) = C (500) + G (100) + Ig (200) + (X-M) (-100) =700

Flow of Earning Approach:

GDP 2013 (2018 Prices) = Interest + Wages + Profit + Rent + Indirect Taxes
GDP 2013 (2018 Prices) = 150 + 300 +150 +100 +0 = 700

Flow of Product Approach = Flow of Earning Approach

10∗10+20∗16+30∗20
GDP Deflator 2013 (2018) = 10∗12+20∗18+30∗25 ∗ 100 = 83

𝐺𝐷𝑃 (2018 𝑃𝑟𝑖𝑐𝑒𝑠) 700

Nominal GDP 2013 = * Def.2013 (2018) = 100 * 83 = 581
100
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 2013 581
Real GDP 2013 (2018 Prices) = *100 = *100 =700
𝐷𝑒𝑓.(2013) 83

*2018
Flow of Product Approach:
GDP (2008 Prices) = C + G + Ig + (X-M)
C = 600
G = 200
Ig = 110
X-M = -60
GDP 2018 (2008 Prices) = C (600) + G (200) + Ig (110) + (X-M) (-60) = 850

Assignment 1-A18 –Answer Template - Revised

Flow of Earning Approach:
GDP at Market Prices 2018 (2008 Prices) = GDP at Factor Prices + Indirect Taxes
GDP at Market Prices 2018 (2008 Prices) = 770 + 80 = 850

Flow of Product Approach = Flow of Earning Approach

15∗12+15∗18+35∗25
GDP Deflator 2018 (2008) = 15∗20+15∗16+35∗20 ∗ 100 = 107

𝐺𝐷𝑃 (2008 𝑃𝑟𝑖𝑐𝑒𝑠) 850

Nominal GDP 2018 = * Def.2018 (2008) = 100*107 = 910
100
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 2018 910
Real GDP 2018 (2018 Prices) = * 100 = 100*100 = 910
𝐷𝑒𝑓.(2018)

*2023
Without Investment
ΣV. A = (i + w +r + p) industry3 +( s industry 2 - m industry 2) + V.A industry 1
ΣV. A = 318 + (400-220) + 140 = 638
Indirect taxes (2023 Prices) = 62
62
Indirect taxes (2018 Prices) = 84*100 = 74

GDP (2023 Prices) = ΣV. A (638) + Indirect taxes (74) = 712

20∗15+25∗24+20∗5
GDP Deflator 2023 (2018) = 20∗12+25∗18+20∗25 ∗ 100 = 84

𝐺𝐷𝑃 (2023 𝑃𝑟𝑖𝑐𝑒𝑠) 712

Nominal GDP 2023 (2018 Price) = * Def.2023 (2018) = 100 * 84 = 598
100
Real GDP 2023 (2018 Price) = 712
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 2023 712
Real GDP 2023 (2023 Price) = * Def.2018 = 100 * 122 = 869
100

With Investment

Proposal A

ΔI (2013 Prices) 30
ΔI (2018 Prices) = * Def.2018 = 100 *122 = 36.6
𝐷𝑒𝑓.2013
56000−50000
MPC = 54000−50000 = 1.5
1 1
ΔY = Δ I * (1−𝑀𝑃𝐶 ) = 36.6* (1−1.5) = -73
Real GDP 2023 (Proposal A: 2018 Prices) = GDP 2023 + ΔY = 712 - 73 = 639

Proposal B

ΣV. A = ΣS - Σ m = 900 - 200 = 700

GDP 2023 (Proposal B: 2013 Prices) = ΣV. A + Indirect Taxes = 700 +134 = 834
20∗15+25∗24+20∗5
GDP Deflator 2023 (2018) = 20∗12+25∗18+20∗25 ∗ 100 = 84
𝐺𝐷𝑃 2023 (2018𝑃𝑟𝑖𝑐𝑒𝑠) 834
Real GDP 2023 (Proposal B: 2018 Prices) = 𝐷𝑒𝑓.2023 (2018 𝑃𝑟𝑖𝑐𝑒𝑠) * 100 = * 100 = 993
84

Assignment 1-A18 –Answer Template - Revised