An economy that is closed to the outside world and has no government is made up of three industries

(there is no trade within industries). Industry X extracts raw materials from mines and produces energy,

it pays 8000 million to its workers and it sells 7000 million worth of output to industry Y, 4000 million

worth to industry Z, and 4000 million worth direct to consumers (through its own energy supply

network). Industry Y makes a range of manufactured goods and sells 16000 million worth to to households, and pays 8000 million in wages to its workers. Industry Z provides a range of services,

selling 17000 million worth to consumers and paying its workers 11000 million in wages. There are no

transactions between industries Y and Z and there are no other industries in the economy.

a) What is the value of GDP?

b) What added value is generated by the Manufacturing Industry?

c) What is the profit made in the Service industry?

d) What percentage of GDP do profits represent?

e) What is the relationship between GDP at market prices, and Gross Value Added at basic prices.

Question 2

In Utopia (a country with substantial excess resources), consumers spend 70% of their incomes and

save 30%; the country spends 30% of GDP on imports and the government typically takes 10% of

household incomes in taxation.

a) What is the value of the multiplier?

Last year, the Utopian Government spent 5Bn Utopian Dollars on current expenditure; Utopian

households spent 0.5Bn Utopian Dollars in "autonomous consumption" and Utopian enterprises sold

goods and services worth 10 Bn Utopian dollars to other countries. Utopian investors spent 15Bn

Utopian dollars in maintaining and enhancing the country's capital equipment.

b) What was the value of GDP last year?

c) What was the value of the Utopian Government's budget surplus or deficit last year?

d) How would the value of the multiplier (in 2(a) change if Utopia was a closed economy (so zero

imports)?

e) If the Utopian economy were already at its potential GDP (ie its full -employment GDP), what

would happen to the value of the multiplier?