Question

The French Government announced that it will need to spend 8 billion Euros to repair Notre Dame cathedral. At the same time, the Filipino Government announced it was going to spend 20 million pisos to rebuild a bridge in Manila that was destroyed in a recent mudslide. Economists at the International Monetary Fund have posted data on income and consumption patterns for both France and the Philippines posted below. Based on this data:

1) What will be expected overall GDP growth in France resulting from the Notre Dame cathedral repair?

2.) What will be expected overall GDP growth in the Philippines resulting from the Manila bridge rebuilding project?

3.) Explain why the growth amounts in relation to the project sizes differs for France versus the Philippines.

French Consumption Patterns Per Disposable Income Level:

Disposable Income Level	Consumption Amount
25,000 €	17,500 €
27,000 €	18,900 €
29,000 €	20,300 €
31,000 €	21,700 €
33,000 €	23,100 €
35,000 €	24,500 €
37,000 €	25,900 €

Filipino Consumption Patterns Per Disposable Income Level:

Disposable Income Level	Consumption Amount
₱11,500	₱10,350
₱12,000	₱10,800
₱12,500	₱11,250
₱13,000	₱11,700
₱13,500	₱12,150
₱14,000	₱12,600
₱14,500	₱13,050

Answer 1

1) From the given data, it can be observed that for every 2,000€ increase in disposable income in France, the consumption increases by 1,400€.

Marginal propensity to Consume, MPCFrance = Increase in Consumption/Increase in disposable income = (1,400€)/(2,000€) = 0.70

Spending multiplier in France = 1/(1-MPCFrance) = 1/(1-0.70) = 1/0.30 = 10/3 = 3.33

Amount spent on the Notre Dame cathedral repair = 8 billion Euros

Expected overall GDP growth in France = Amount spent * Spending multiplier = 8 billion Euos * 10/3 = 26.67 billion Euros

2) Similarly, for every ₱500 increase in disposable income in Philippines, the consumption increases by ₱450.

Marginal propensity to Consume, MPCPhilippines = Increase in Consumption/Increase in disposable income = (₱450)/(₱500) = 0.90

Spending multiplier in Philippines = 1/(1-MPCPhilippines) = 1/(1-0.90) = 1/0.10 = 10

Amount spent on the Manila bridge rebuilding project = ₱ 20 million

Expected overall GDP growth in Philippines = Amount spent * Spending multiplier = ₱ 20 million * 10 = ₱ 200 million

3) The growth amounts in relation to the project differ for both the countries. This is because of the effect of the spending multiplier in the countries which in turn depends on the marginal propensity to consume in the countries.

In the Philippines, people spend more proportion of additional income received on consumption as compared to France. This results in difference in the spending multipliers which in turn affect the value of overall GDP growth.