Question

1. Consider the following data of an economy in a certain year:

Item Private consumption expenditures	Value($) 1,500
Private investment expenditures	500
Government expenditures on final goods and services	500
Tax revenue	800
Transfer payment	300
Total exports of goods	800
Total exports of services	1,500
Total imports of goods	1,000
Total imports of services	500

1. What is the Gross Domestic Product (GDP) of this economy?(6 marks)
2. What are the government's budget balance and trade balance respectively            (4marks)
3. Suppose the GDP deflator of this economy is 110 in the current year. Calculate the real GDP of this economy.(4 marks)

2. Discuss three problems of real GDP per capita as a measure of economic well-being. (6 marks)
3. Discuss why the Consumer Price Index (CPI) in Hong Kong is divided into CPI(A), CPI(B) and CPI(C).

Answer 1

1)GDP of the economy is 3300. here we are calculating GDP with expenditure method so we are following the formula of

Y= C+I+G+X-m

2) balance of trade is -200 (substracting import of goods from export of goods) and balance of payment is 800 (substracting both import of goods+services from export of goods+services).

3) if gdp deflator is 110 then real gdp will be 3000. by solving 3300/real gdp multiplied by 100= 110

4) real gdp per capita does not reflect the wellbeing of the people completely because it doesnot take into account the happiness of the people. as it only takes into account the total notional income or say output it doesnot reflect whether people are having basic amenities to live a good life or not. also it doesnot reflect the mental situation of people like the peace of mind and health.

5) in hongkong the CPI is divided into CPI(A) CPI(b) & CPI(C) to reflect expenditure patterns of households in the relatively low, medium and relatively high expenditure ranges. they compile all these CPI calculus and make a composite index out of it.