Group work

ECONOMIC PERFORMANCE
1) Distinguish between GDP and GNP as measures of economic activity
2) Explain how the circular flow of income functions as a system with leakages and injections.
3) Explain the process by which nominal GDP is calculated and distinguish it from real GDP
using an example.
a) Suppose an economy produces three goods ,i.e,apples,bananas and oranges. In 2016
100apples were produced and sold at 50cents each,200 bananas were produced at
25cents each and 150 oranges were produced at 30 cents each. In 2021 150 apples were
produced and sold at $1 each,200 bananas were produced and sold at 40cents each and
100 oranges were produced and sold at 50cents each.
i. Calculate nominal GDP (GDP at current prices ) for the year 2016 and the year
2021.
ii. Calculate Real GDP for the year 2021 using 2016 as the base year.
iii. Calculate the increase in nominal GDP.
iv. What was the increase in terms of real GDP.

b) Given that GDP deflator =nominal GDP/Real GDP*100

If the GDP at current prices in 2019 was 107221and 123126 million in 2020; whereas
Real GDP was 257292 in 2019 and 254175 million in 2020 ,calculate the GDP deflator
for 2019 and 2020.
Calculate the GDP deflator in 2019 and 2020.
What was the inflation rate in 2020?
Why is the GDP deflator an important index?
Fill in the table below

Year GDP@current GDP@ GDP Inflation

prices constant deflator rate
prices
2011 107221 252792 41.7 -
2012 123126 254175 48.4 16.1
2013 143255 254221
2014 167098 259561
2015 200448 270463
2016 240639 276940
2017 276060 276060
2018 310074 273249
2019 340963 267257
2020 383071 270181
2021 432753 276464
Give a brief comment on what was happening to this economy from 2011 to 2021

c) If in 2011 GDP was US $ 64 billion and CPI was 125, Real GDP is calculated as follows:

Real GDP =Nominal GDP/GDP deflator

= 64/(125/100)
= 64 x 100/125
 = $ 51.2 billion
If in 2021 GDP was US $ 64 billion and the CPI was 92.What is the real GDP?

4) Using templates distinguish between the income and expenditure approach.

5) Use the questions below to validate your presentation on the income and expenditure
approach.

a) Study the following and answer the questions that follow

Government spending on goods and services 900

Transfer payments 320

Gross private domestic investment 410

Income from foreign employment 750

Taxation 340

Consumption 950

Imports 150

Exports 330

Net property income from abroad ( -270)

Saving 60

Calculate the Gross national product using the expenditure approach.

b) According to the national income identity Y=E=O (income =Expenditure=Output).Prove that

this is so using the income ,expenditure and output approach.

Calculate the national income using the expenditure and income approach.

Personal Consumption expenditure 10001

Net export of goods and services (X-M) (-386)

Compensation of employees (W) 7819

Rent 274

Interest (I) 982

Proprietors income (P) 1012

Corporate income taxes 255

Dividends 612

Gross Private domestic investment 1590

 Government expenditure 2914

Undistributed corporate profits 39

Indirect business taxes 1081

Consumption of fixed capital 1861

Net foreign factor income 5

Statistical discrepancy 179

Agriculture ,forestry and fishing 184.6

Mining 2057.1

Utilities 184.3

Construction 518.6

Manufacturing 1215.2

Transport,warehousing 337.9

Wholesale trade 706.1

Retail trade 812.4

Information 423.2

Professional and business services 1684.8

Finance,insurance,real estate,rental and leasing 1901.5

Educational,healthcare,social assistance 1244.8

Arts,entertainment,recreation,accommodation,food services 453

Other services 2395.5

c) Study the data below and answer the questions that follow;

Income from employment 226.4

Gross trading profits of companies 65.6

Gross trading surpluses of public companies 6.4

Stock appreciation 4.9

Interest income 3.2

Income from rent 24.8

Income from self employment 33

Agriculture, forestry and fishing 5.9

Energy and water 24.2

 Construction 21.5

Manufacturing 85.6

Adjustment for financial services 20.6

Services and distribution 237.9

i. Use the income approach and the output approach to calculate GDP@ factor cost. Your
answer should prove that NY=NO.
ii. Comment on the additions and subtractions that you have made to ensure agreement
between the two methods.

6. What are the uses and limitations of National income statististics in comparing the performance
of different countries?How can these challenges be overcome?

AGGREGATE DEMAND AND AGGREGATE SUPPLY MODEL

1) What causes movements along the AD curve and shift of the AD curve
2) What causes movements along the AS curve and shift of the AS curve.
3) Identify the components of aggregate demand and briefly explain and give an exhaustive
analysis of the determinants of these components.
4) They are competing theories on the possible response of a nations producers to changes in the
price level,depending on how prices and wages in an economy change following a change in
AD.Using appropriate diagrams describe these models of Aggregate Supply.
5) A fall in aggregate demand causes a decline in the short run equilibrium output and
employment. What is the major reason behind this?What rigidities exist in many countries
which could account for this?
6) Distinguish between a recessionary gap (negative output gap) and an inflationary gap (positive
output gap) .You are encouraged to use diagrams
7) What is the full employment level of output (Yfe).
8) With the aid of diagrams discuss the implications of the following;
a) Positive aggregate demand shocks and negative Aggregate demand shocks.
b) Positive aggregate supply shocks and negative supply shocks.
9) Illustrate how an economy would recover from short run deflationary gap and inflationary gap in
the long run.
10) To what extent is the level of interest rates in an economy the primary factor businesses
consider when making investment decisions.
11) Using AD/AS diagrams ,analyse the likely impact on an economy of the following;
a) A general rise in wage costs
 b) The discovery of new raw material sources
c) Capital stock increases .
d) Increase in income tax.
12) What is the likely effect of the above on a nations economy in the shortrun and the long run.
13) Evaluate the likely impact on an economy of a substantial rise in the level of savings among the
nations households.

THE MACROECONOMIC OBJECTIVES

1) Discuss the types of unemployment,their causes and solutions to these types of
unemployment.
2) To what extent is the existence of structural unemployment in a nation a sign of economic
weakness
3) Examine the various costs of a persistently high level of cyclical unemployment.
4) Explain the concept of natural rate of unemployment.What factors can cause the natural
rate of unemployment to change?
5) Critically analyse the the limitations of the unemployment rate.
6) What are the consequences of unemployment in a nation.
7) Define the Consumer Price Index.Study the following and attempt the questions that follow

Country A measures only three goods in its CPI :Pizza,haircuts and wine

Good/service Price in July ($) Price in August ($) Price in September ($)
Pizza 10 10.5 10.5
haircuts 20 19 18
wine 8 10 10
Total basket price 38 39.5 38.5

Assume July is the base period .Calculate and interpret

i. The CPI for July

ii. The CPI for August
iii. The CPI for September
iv. Analyse what has happened to the CPI between July and August.

8) Use the table below to answer the questions below

2013 2014 2015 2016 2017 2018 2019

Country A 108.4 107.9 107.7 108.3 108.5 108.6 109.1
‘sCPI
 Calculate country A’s inflation over the seven years

i. Between which years was inflation rate the highest?Lowest?

ii. Between which years did country A experience disinflation
iii. Between which years did country A experience deflation?

9) The Table below shows the average prices of the goods purchased by a typical consumer in country Z
in 2019 and 2020,as well as the percentage of a typical household income spent on each item.

Good Average Price (2019) Average price (2020) % of income spent on

each item
Hamburger 5 5.50 15
Prescription drugs 12.50 10 10
Rent 90 105 40
Book 8 6.50 15
Petrol 15 18 20
Weighted Total - -

a) Use the table to construct a weighted price index for country Z for 2019 and 2020,using
2019 as the base year.
b) Use your results to calculate the rate of inflation .
c) Asuume the price of books increases by 10% from 2019-2020,but the price of all other goods
remain constant .What would be the effect on the inflation rate?
d) Now assume the price of rent increases by 10% instead,and all other prices remain
constant.What would be the effect on the rate of inflation?
e) Why does an increase in the price of some goods have a greater effect on in inflation than
identical percentage changes in the price of other goods ?

(hint :Weighted Price of basket of foods=Pa*% of Y spent on good a +Pb *% of Y spent on

b+………..+Pn*% of Y spent on good n) .In this case Price Index =WPI/WPI in base year. To check
effect on inflation:% ∆ CPI=%∆ in Price category*weight or % of income spent on good).

10) Whilst the CPI provides an inflation rate that is meaningful to most household ,the figure does
have shortcomings that must be acknowledged.Give an explanation of these limitations.
11) Discuss the types of inflation prevailing in your country.What are the consequences and
solutions to inflation.
12) Compare and contrast the effects of inflation in an economy on different stakeholders.
13) If demand pull inflation persists it leads to cost push inflation in what is known as the
inflationary spiral.Explain this phenomena with the aid of two diagrams (Hint:one showing the
spiral then one showing an AD/AS diagram showing how demand pull results in cosh push).
14) What is deflation?What are the causes of deflation?What are the consequences and solutions to
deflation.
15) Demand deficient deflation leads to a deflationary spiral which could push an economy into
deeper recession.Describe this phenomena.
16) Explain how the theory of the Phillips curve can be used to explain why it is often thought that a
low level of unemployment makes an inflationary outburst inevitable.(do a thorough review of
the theory)
17) What is fiscal policy? Show your understanding of contractionary fiscal policy and expansionary
fiscal policy.
18) With the aid of examples clearly distinguish between discretionary fiscal policy and automatic
fiscal policy (automatic stabilisers in fiscal policy).
19) Can fiscal policy be used to promote long run economic growth?
20) Discuss the strengths and weaknesses of fiscal policy.
21) How is money created in a fractional reserve banking system
22) Describe the tools of monetary and clearly articulate how they are used to solve either an
inflationary or deflationary gap.
23) Evaluate the effectiveness of monetary policy during a recession.
24) Evaluate the effect of market based supply side policies (Hint:Discuss the types then their
stregths and weaknesses)
25) Evaluate the effect of interventionist supply side policies (do the same as above)

26) Explain the difference between demand side and supply side economic policies.

FREE TRADE AND PROTECTIONISM

1) Explain the pros and cons of free trade.Why do countries need to trade?
2) With the aid of examples explain the theory of absolute and comparative advantage.
 3) Study the table below and attempt the questions that follow

Country Output of TVs Output of Smart phones

Country C 10 5
Country J 20 15

i. Illustrate the above on a production possibility curve

ii. Which country has pure absolute advantage?According to Sir Adam Smith would it be
beneficial to trade?Why is his reasoning faulty?
iii. Using the Ricardian approach to international trade show;
iv. Which country has a low oppoprtunity cost in the production of TV and Smartphones.
v. How will the countries specialise
vi. Show your calculations in a well labelled opportunity cost table.
vii. At what price will the two countries trade for the goods that they are not producing?
viii. Based on the rate of exchange determined above ,draw a new production possibilities
curve on the graph you drew earlier clearly showing the new levels of consumption in
both countries with trade.
ix. (Attempt more questions on this from your slides )

4) What are the limitations of the Ricardian approach?

5) What is protectionism? What are the arguments for and against protectionism?
6) Describe the different types of protectionism that can be used by nations.
7) Explain using a tariff diagram, the effects of imposing a tariff on imported goods on domestic
producers, foreign producers, consumers and government.
8) Explain using a diagram, the effects of setting a quota on foreign producers on different
stakeholders listed above.
9) Explain, using a diagram the effects of giving a subsidy to domestic producers on different
stakeholders.
10) Describe administrative barriers that may be used as a means of protectionism
11) Evaluate the effect of different types of trade protectionism.

EXCHANGE RATES AND THE BALANCE OF PAYMENT

1) Discuss the determinants of exchange rates in a floating exchange rate system.
 2) Evaluate the possible economic consequences of a change in the value of a currency (Hint:
include effects on a country’s inflation rate, employment, economic growth and current
account balance. Basically discuss effects of appreciation and depreciation).
3) How do governments actively manage the exchange rate of their currency against other
currencies?( Hint :How do Central banks maintain an exchange rate at a certain peg ?What do they do
specifically if they expect their currency will depreciate /appreciate to keep it at the same desired peg?)
4) You are given the following exchange rates

$1 = ₤0.65

₤1 = $1.56

a) Interpret the above rates and draw relevant diagrams to illustrate them.
b) Distinguish between
(i) the volume quotation and price quotation systems of quoting exchange rates
(ii) Appreciation and depreciation
(iii) Devaluation and Revaluation
(iv) Soft versus hard currency
(v) Nominal versus real exchange rates
c) How do Central banks maintain an exchange rate at a certain peg ?What do they do
specifically if they expect their currency will depreciate /appreciate to keep it at the
same desired peg?
d) How is the British Central bank going to maintain a peg of $1 = ₤0.65
(f) Suppose the American Central Bank wants to maintain the peg at a minimum of ₤1 =
$1.25 and at a maximum of ₤1 = $1.56.Illustrate this on a diagram together with the
original figures and proceed to explain how they will keep the exchange rate within
these boundaries.
5) Evaluate the different types of exchange rate regimes you know.
6) Using a template, discuss the components of the BOP account (Current Account, Financial
account, capital account, official reserves Account).

Study the data below and answer the questions that follow

2005 2006 2007

Net unilateral transfers 20 (30) 40
Invisible Exports 240 240 240
Net Private investment 420 80 200
Visible exports 500 800 900
Net factor income 35 (10) 15
Invisible imports 100 210 120
Contributions to 80 55 70
African Development
bank
Visible imports 200 900 320
Loan repayment to 40 45 80
World bank
Balancing item 130 60 60
 i. Calculate the BOP for 2005, 2006 and 2007 respectively clearly showing the balance on
current account and capital account.
ii. Comment on the changes in reserves
iii. Comment on the trend that you are observing is as far as BOP is concerned over the
three years under study.

(Check past exam papers for more work on BOP and Do the exercises on your PowerPoint slides
for calculating BOP).