Question One

a)What is the difference between gross domestic (GDP) and gross national product (GNP) and which is likely to be lower in developing countries? Why?(4 Marks)

c)The following data relates to the market value of economic transactions for the three main sectors of your country's economy.

Sector Value of Output Purchases from other firms

Agriculture 300 160

Manufacturing 200 150

Services 150 120

Required:

(i)Compute the gross domestic product (GDP) and explain the method used and why.(2 Marks)

(ii)Given that:depreciation = 90, indirect taxes = 70, subsidies = 30, payments to factors of production from abroad = 20, payments to foreign factors = 40.

Compute:

1)Gross national product (GNP) at market prices.(1 Mark)

2)Net national product (NNP) at market prices.(1 Mark)

3)Net national product (NNP) at factor cost.(1 Mark)

4)Net domestic product (NDP) at factor cost(1 Mark)

Question Two (20 Marks)

You are given the following data in billions of dollars on your country's economy:

Investment - 150, Government spending = 130, Exports = 70, Imports = 60, Autonomous consumption = 100, marginal propensity to save = 0.25.

a)Compute the consumption and saving functions for this economy and indicate the assumptions used.(4 Marks)

b)Compute the equilibrium level of income.(4 Marks)

c)Determine the equilibrium level of consumption and savings.(2 Marks)

d)Define and compute the multiplier.(2 Marks)

e)You are given that the full employment level of national income is 735 billion.Would this economy be experiencing deflationary of inflationary gap?Why? What is the magnitude of the gap and what could the government do to remove it?(4 Marks)

f)The government decided to increase its spending by 60 billion.Compute the equilibrium level of income and explain why income has or has not changed from the original level.(4 Marks)