Question

Consider the following data of the country ABC (ABC) economy in 2019: million ($)

Private consumption expenditure $900,000

Gross domestic Investment $240,000

Government expenditure $30,000

Government welfare payment $20,000

Total exports $1,500,000

Total imports of goods $1,400,000

Total imports of services $160,000

-----------------------------------------------------------------------------------------------

Total population 8,000,000

Total working age population 7,000,000

Total labor force 3,650,000

Total number of unemployed person 250,000

Total underemployed person 180,000

a) Calculate A BC economy’s nominal GDP in 2019. (1 mark)

b) If GDP deflator of ABC economy is 130 in the 2019. Calculate the real GDP of ABC economy. (1 mark)

c) What is the labor force participation rate? (1 mark)

d) What is the amount of net export?

e) What is the unemployment rate? Is it high or low?

f) Explain how the inflation rate of ABC economy will be affected if

i) the government imposes an import duties on all imported goods.

ii) the government increases its expenditure in constructing road.

g) Regarding inflation, in 2012, the Federal Reserve of the United States (US) announced its first explicit inflation target: an average inflation rate of 2% per year. There are arguments that support or against the use of inflation targeting as a framework for carrying out monetary policy. Please state and discuss the arguments of both sides.

Answer 1

a> Nominal GDP is Consumption+Government expenditure+Investment+EXport-IMport = (900+30+240+1500-1400-160)*1000 =  $1,110,000 million

b> We know GDP deflator= 100*Nominal GDP/Real GDP

So, real GDP is (1100000/130)*100 = $853,846.153846 million

c> Labor force participation rate is the ratio of labor and total working age population = 7000/8000 = 87.5%

d> The amount of net export is the difference between export and import = (1500-1400-160)*1000 = -$ 60,000 million