Tutorial 2: Section B ~ Essay Questions

1. The table below shows the national income accounting data for a country in the year
2016:

Items RM (Billion)
Consumption expenditures (C) 2,446
Government expenditures on goods and services (G) 4,810
Gross private domestic investment (I) 2,837
Capital consumption allowance 925
Indirect business taxes 146
Exports (X) 4,899
Imports (I) 4,855
Income earned from the rest of the world 1,456
Income earned by the rest of the world 1,628
Using the expenditure approach, calculate the following values:

(i) Gross Domestic Product (GDP); (5 marks)

= Consumption + Investment + Government purchases + (Exports - Imports)
= RM [2446 + 2837 + 4810 + (4899 – 4855)] billion
= RM [10093 + 44] billion
= RM 10137 billion

(ii) Gross National Product (GNP); (4 marks)

= GDP – Income earned by the rest of the world + Income earned from the
rest of the world
= RM [10137 – 1628 + 1456] billion
= RM 9965 billion

(iii) National Income (NI) (4 marks)

= GNP – Consumption of fixed capital – Indirect business taxes
= RM [9965 – 925 – 146] billion
= RM 8894 billion
2. The following table shows the national income figures, price indices and population for
a hypothetical country in years 2006 and 2007.

2006 2007
National GDP RM5,000 million RM7,200 million
Price Index (year 2000 = 100) 120 160
Population 10 million 11 million

(i) Calculate the real GDP in years 2006 and 2007. (4 marks)
Real GDP in year 2006 = (GDP/Price Index) x 100
= (RM5000 million/120) x 100
= RM 4166.67 million

Real GDP in year 2007 = (GDP/Price Index) x 100

= (RM7200 million/160) x 100
= RM 4500 million

(ii) Calculate the real GDP per capita in years 2006 and 2007. (4 marks)
Real GDP per capita (2006) = Real GDP/Population
= RM4166.67 million/10 million
= RM 416.67

Real GDP per capita (2007) = Real GDP/Population

= RM4500 million/11 million
= RM 409.091

(iii) Calculate the rate of economic growth between 2006 and 2007. (4 marks)
% change in Real GDP= (Real GDP Y2 – Real GDP Y1)/ Real GDP Y1 x 100
= [(4500 million – 4166.67 million)/ 4166.67 million] x
100
= 8%
3. Briefly explain any FIVE (5) reasons why GDP does not necessarily measure the well-
being of a country. (4 marks)
GDP does not measure some very useful output because it is unpaid. For example:
parental child care, homemakers’ services, and volunteer efforts.
GDP does not measure improved living conditions as a result of more leisure because it
is too difficult to quantify.
GDP makes no value adjustment for the distribution of income. Uneven income
distribution does not affect the quality of life and standard of living.
GDP makes no value adjustments for changes in the composition of output. Nominal
GDP simply adds the RM value of what is produced and it makes no different if a product
is a semi-automatic rifle or a jar of baby food.
GDP does not deduct the harmful effects of pollution. For example: the oil spills, it will
increase the incidence of cancer.

4. With the aid of a diagram, briefly describe the FIVE (5) phases of the business cycle.
(10 marks)

The entire business cycle is measured from peak to peak.

Peak: at the peak of the business cycle, Real GDP is at a temporary high.
Contraction: a decline in the Real GDP. If it falls for two consecutive quarters, it is said to
be in a recession.
Through: the low point of the GDP, just before it begins to turn up.
Recovery: when the GDP is rising from the trough and ends at the initial peak.
Expansion: when the real GDP expands beyond the recovery.
5. Differentiate between Gross Domestic Product (GDP) and Real Gross Domestic Product
(RGDP). (6 marks)

Gross Domestic Product (GDP) – nominal Real Gross Domestic Product (RGDP)
Value of the entire output produced Value of the entire output produced
annually within a country’s borders, annually within a country’s borders,
without adjustment for price changes. adjusted for price changes.
GDP is calculate based on the current Real GDP is equal to the sum of all current
price and do not adjusted the price to year quantities times their base-year
based-year prices in RM. prices in RM.
GDP = C + I + G + (X-M) Real GDP = (GDP/Price Index) x 100
Total (Current-year price x Current-year Total (Base-year price x Current-year
quantity) quantity)

6. The table below show the national income accounting data for a particular country for
the year 2017:

Items RM million
Net Interest 36
Corporate profit 50
Indirect Business tax 15
Proprietors’ income 45
Compensation of employees 560
Consumption of fixed capital 6
Rental Income 27
Income earned by the rest of the world 10
Income earned from the rest of the world 15
Statistical discrepancy 5
Using the income approach, calculate the following values:
(i) National Income (NI); (4 marks)
 = Compensation of employees + Proprietors’ income + Corporate profit +
Rental income + Net interest
= RM (560 + 45 + 50 + 27 + 36) million
= RM 718 million

(ii) Gross National Product (GNP); (4 marks)

= NI + Indirect business tax + Consumption of fixed capital + Statistical
discrepancy // GDP – Income earned by the … + Income earned from the …
= RM (718 + 15 + 6 + 5) million
= RM 744 million

(iii) Gross Domestic Product (GDP); (4 marks)

= GNP – Income earned from the rest of the world + Income earned by the
rest of the world
= RM (744 – 15 + 10) million
= RM 739 million

(iv) GDP per capita if the population for the year is 5 million. (3 marks)
= GDP/Population
= RM 739 million/ 5 million
= RM 147.80 per capita