Question 1

The equality of the Production measure of GDP with the Income measure of GDP and the Expenditure
measure of GDP may be explained through the economic model of the Circular Flow of Income. The
Circular flow of Income refers to the process by which income is generated through production and
sales. The income generated creates demand for goods and services which result in expenditure that
makes further production possible thereby continuing the cycle of production, generation of income and
expenditure.

Assume a simple, closed economy with Households and Firms, in which all production is consumed.
Inputs of economic resources such as Land, Labour, Capital and Enterprise are owned and provided to
the producing units by the Households. Households earn income in exchange for the factor services they
provide. The producing units transform the factor services to produce output of goods and services
which are then sold domestically to the Households. The Households use the money income earned from
the sale of their factor services to purchase the output of the producing units, who then use the money
expenditure of the households to purchase factor inputs to continue the cycle. The total value of the final
output produced and sold to households would equal the value of the income generated in their
production and the value of the expenditure of the households on the goods and services produced.

Production measure of GDP is equal to Gross Value Added, which is equal to the Output of
domestically produced goods and services minus Intermediate Consumption.

From the Sequence of Accounts of the SNA, Account 2 , the Generation of Income account shows that Value
Added is equal to the SUM of Income Generated in Production,

The Income Measure of GDP is equal to

Compensation of Employees = 855

Plus Operating Surplus = (62+46+120+105 ) =333

Plus Taxes on products =135

The Income measure of GDP is therefore 1323

The Income Measure of GDP equals Value Added and is equal to the Production measure of GDP

Value Added = Income Measure of GDP. Value Added is therefore equal to 1323.

Continued on the next page

 Expenditure measure of GDP equal

Household Consumption of domestically produced goods = 843

Plus Building Construction by Financial Corporations = 210

Government Expenditures = 250

Plus Exports of Manufactured Goods to the RoW = 40

minus Imports of Raw materials = 20

Total Expenditure on GDP = 1323

Question 2 ( Answer any Four ) 5 marks each

2.1 Inflation refers to a sustained increase in the level of prices in the economy. The Retail Price Index
measures the percentage change in the prices of selected items in a basket of consumer goods and services
between the current year and a chosen base year. It is calculated by dividing the weighted average of the
prices of the current year by the weighted average of the prices of the base period. The resulting number is
then multiplied by 100 to express the index as a percentage.
The GDP Implicit Price Deflator is a price index which is calculated by dividing the value of Nominal
GDP (@ Current Prices) by the value of Real GDP (expressed in constant prices of the base year) and then
multiplying by 100. The GDP Implicit Price Deflator is a measure of the change in the average prices of
aggregate output between the current period and the chosen base year.

2.2 Product balances are based on the understanding that the supply of a product for use in the domestic
economy originates from, the Output of domestically produced goods and services and from Imports and is
equal to the sum of the Uses of that product for Intermediate Consumption + Final Consumption + Capital
Formation + Exports.

2.3 Headline Inflation is the measure of the rate of inflation within an economy. It is computed from the
change in the Retail Price Index between two periods and is based on prices collected in all pricing areas,
for all Items in sections selected for monitoring price changes. Headline Inflation is not adjusted for
seasonality or the volatility of price movements in certain sections of the Index.
Core Inflation is the measure of the rate of inflation that results from adjusting headline inflation to remove
those sections of the index that experience high volatility and can significantly influence the overall inflation
rate. For most countries core inflation is calculated after removing the Food and Energy Items and Prices
from the calculation of the Retail Price Index.
2.4 Market Producers sell most of their output at prices that are economically significant, that is at prices
that have a significant influence on the amount the producers are willing to supply and on the amount
purchasers are willing to demand. Prices are intended to meet and exceed costs of production and generate
surpluses.
Non-Market Producers are producers that provide most of their output free of charge or at prices that are
not economically significant that is at prices that do not have a significant influence on the amounts the
producers are willing to supply or on the amounts purchasers are willing to demand. Prices are therefore not
necessarily set to meet costs of production and generate surpluses. Non- Market Producers are to be found in
the General Government Sector, (which includes Units of Central, State and Local Government and Non
Profit Institutions controlled by Government Units) and the Non- Profit Institutions serving Households
Sector (NPISH).

2.5 GDP at Constant Prices or Real GDP refers to the volume of goods and services produced in the
current period revalued at the prices prevailing in a specifically chosen earlier period in time, referred to as
the Base Year or Reference Year. GDP at constant Prices is alternatively termed Real GDP.

2.6 An Institutional Unit is an economic entity that is capable in its own right of owning assets, incurring
liabilities and engaging in economic activities and in transactions with other entities.
An Institutional Unit can own goods or assets in its own right and can exchange the ownership of goods or
assets in transactions with other institutional units; can take economic decisions and engage in economic
activities for which it is itself held to be directly responsible and accountable at law. It is able to incur
liabilities on its own behalf to take on other obligations or future commitments and to enter into contracts. A
complete set of accounts, including a balance sheet of assets and liabilities exists for the institutional unit or
can be compiled if required.
There are two main categories of institutional units – Households and Legal or Social Entities. A Household
– is a group of persons who share the same living, accommodation, who pool some or all of their income or
wealth and who consume certain types of goods and services collectively, mainly housing and food. A Legal
or social entity - is one whose existence is recognised by law or society independently of the persons, or
other entities, that may own or control it.
Question 3
What does a Balance of payments measure 4 marks
The Balance of Payments statement is a record of the economic transactions between resident institutional
units of the country and institutional units of the Rest of the World during a period of one year. Country
Payments to the Rest of the World are recorded as Debit Entries while Country Receipts from the Rest of the
World are recorded as Credit Entries. The Balance of Payments Statement measures certain key aggregates
including, the Balance on Merchandise Trade; The Balance on Current Account; The Balance on Capital
Account and the Balance of Payments.

BALANCE OF PAYMENTS STATEMENT

CURRENT ACCOUNT CREDIT DEBIT NET
1. GOODS

Merchandise 11239 6504

BALANCE OF MERCHANDISE TRADE (4 marks) 4735

s

2.SERVICES [2.1+2.2] -232

2.1 Travel 450 71
2.2 Insurance Services 139 750

3. INVESTMENT INCOME of which: -1079

interest earned on external securities 300
interest earned on investments abroad 1379

4. CURRENT UNREQUITED TRANSFERS 109 80 29

5. CURRENT ACCOUNT BALANCE (1+2+3+4)

(4 marks) 12237 8784 3453

CAPITAL ACCOUNT =[6+7+8]

6. PRIVATE SECTOR DIRECT INVESTMENT 549 173 376

7. OTHER PRIVATE SECTOR 811 4400 -3589

8. OFFICIAL SECTOR -959

Official Borrowing 250 1209
Official Loans
9. CAPITAL ACCOUNT BALANCE (4 marks) 1610 5782 -4172

10. NET ERRORS AND OMMISSIONS 719 0 -719

11. OVERALL BALANCE 0 0 0

12. CHANGE IN RESERVES 0 0 0

TOTAL 114566 14566 0

Balance of Payments (4 marks) 0 or -719 accepted

To calculate the Net Errors and Omissions and the Overall

Balance
Net Current Account Balance 3453
+ Net Capital and Financial Account Balance -4172
+ Change in Reserves 0
+ Net Errors and Omissions -719
=0 0
where Net Current Account Balance + Net Capital and
Financial Account Balance + Net Errors and Omissions =
Overall Balance
Net Current Account Balance 3453
+ Net Capital and Financial Account Balance -4172
+ Net Errors and Omissions 719
=Overall Balance 0
Overall Balance = - Change in Reserves 0

note that a negative change in Reserves means an increase

in Reserves
note that the Overall surplus or deficit is minus the change
in Reserves
where the change in Reserves is negative (meaning it has
increased), then the Overall Balance will be positive
QUESTION 4 (Each Index 5 marks; Comment on Food Prices 5 MARKS)

2010 2013 LASPEYRES PAASCHE

PRICE QTY PRICE QTY FORMULAE FORMULAE
P0 Q0 P3 Q3 P0 Q0 PnQ0 P0Qn PnQn
FLOUR 12 6 15 4 72 90 48 60
SUGAR 8 4 13 4 32 52 32 52
MILK 4 9 9 7 36 81 28 63
RICE 8 2 12 3 16 24 24 36
SUM 156 247 132 211

LASPEYRES PRICE INDEX PAASCHE PRICE INDEX

247 211
𝑋 100 𝑋 100
156 132

158.3 159.8

FISHER PRICE INDEX

SQRT ((158.3*159.8))

= 159.05
QUESTION 6 4 MARKS FOR EACH ACCOUNT

PRODUCTION ACCOUNT

USES RESOURCES

Mat. Inputs used in Production 250 Output Of Domestically Produced Goods 350

Service consumed in Production 100 Output of Domestically Produced Services 650

Fuel, Elec, & Water used in production 50

GROSS VALUE ADDED (OUTPUT - INT) 600

TOTAL TOTAL
1000

ALLOCATION OF PRIMARY INCOME ACCOUNT

USES RESOURCES

Op Surplus 0

Compensation of Employees 600

Comp. & Prop. Inc Receivable from ROW 10 Comp. & Prop. Inc Receivable from ROW 40

Balance of Primary Income 630

TOTAL TOTAL
640

SECONDARY DISTRIB. OF INCOME CCOUNT

USES RESOURCES

Balance of Primary Income 630

Current Transfers payable to the ROW 25 Current Transfers receivable from the ROW 15

Disposable Income 620

TOTAL TOTAL
645 645
USE OF DISPOSABLE INCOME ACCOUNT

USES RESOURCES

Final Cons. Expend. Of H/H & Gov't. 400 Disposable Income 620

Adj. to the change in pension entitlement 0 Adj. to the change in pension entitlement 0

Saving 220

TOTAL TOTAL
620 620

CAPITAL ACCOUNT

CHANGES IN ASSETS CHANGES IN LIAB. & NET WORTH

Gross Fixed Capital Formation 125 Saving 220

Change in Inventories 25

Consumption of Fixed Capital 0

Capital transfers to ROW 10 Capital Transfers from ROW 10

Net Lending (+) / Net Borrowing (-) 70

TOTAL TOTAL
230 230
Question 7
Basic Prices reflect the actual revenues receivable by the Producer and therefore the actual production costs
incurred by the producer. The Basic Price is the amount receivable from the purchaser for a unit of a good
or service produced as output minus any tax payable plus any subsidy receivable by the producer as a
consequence of its production or sale. The Basic Price should not include any Transport charges that are
invoiced separately by the producer.

The Producers’ Price is the amount receivable by the producer from the purchaser for a unit of a good or
service produced as output minus any VAT or similar deductible tax invoiced to the purchaser. Transport
charges invoiced separately by the producer are excluded.

Neither Basic Price nor Producer’s Price include any amounts receivable in respect of VAT or similar
deductible Tax. The Producer Price is the price excluding VAT that the producer invoices to the purchaser.

QUESTION 7

Output of Domestic producers at basic prices 1200

1. LESS: Cost of Materials Used 300

2. LESS: Invoiced charges for Transportation of
Materials Purchased 20
3. LESS: Wholesalers Margin on Materials
Purchased 30

4. LESS: Costs of Services Used 250

5. LESS: Services consumed in Production 100

VALUE ADDED @ BASIC PRICES 490

ADD: Taxes on Products 100

MINUS: Subsidies on Products -20

VALUE ADDED at PRODUCERS PRICES 570

ADD: Transportation costs charged separately to
final consumers 50
ADD: Retailers Margin on Re-sales to Households
and Government 90

VALUE ADDED @ PURCHASERS PRICES 710

 (Yellow shaded Items 1-5 represent Intermediate Purchases which are valued always at Purchasers’ Prices)
OUTPUT at Basic Prices minus Intermediates at Purchasers’ Prices equal VALUE ADDED at Basic Prices

To Value Added at Basic Prices, Add Taxes minus Subsidies to arrive at Value Added at Producers Prices
To Value Added at Producers Prices, Add Trade and Transport margins to arrive at Value Added at
Purchasers Prices.

Note Deductible VAT on Goods and on Services is excluded.