Q3. Consider a case in which a given economy reports a GNP level of 5.4bn USD. The primary income net flows are work 1.2bn, while secondary income transfers are worth 0.2bn.

1) What is the implied level of GDP under these circumstances? Note that primary income is associated with income flows for compensating employees whereas secondary income is associated with transfers of income.

2) Demonstrate how the current account surplus is present in the measure of GNP, starting from the equation listed below.

GNP = GDP + Net Primary Income + Net Secondary Income

Using GDP, consider the fact that consumption (C) is equal to 1.5bn, investment (I) is 1.8bn and the government runs a balanced budget and collects 0.4bn in revenue (G).

3) What is the value of net exports? Show your work.

4) What is the value of savings? Show your work.

5) Suppose there is a shock to the economy, and the government is forced to run a major budget deficit 1.2bn. What does this imply about the tax rate for the country?

6) Update your measure of GNP to reflect this change in the government budget balance. Show your workings. What is the percentage change in GNP?