Question

Country Ferrara is an economy in the far west. You are being summoned by the King of Ferrara to help his ministers to estimate the GDP of Ferrara in 2017.

1. Please use the formulas and techniques to estimate the GDP using any two methods.
2. Name the methods and show the GDP estimation.

Please see the table below

Interest Payments 170

Consumption 500

Wages and Salaries 250

Depreciation costs 50

Exports 120

Rental income 320

Net Indirect taxes ( taxes- subsidies) -110

Gross fixed capital formation (Investment) 250

Net foreign Income -280

Profits 240

Imports 90

Government Expenditure 200

b) Meanwhile, Explorers of Ferrara have discovered a new set of economies Ravenna, Liguria and Ancona and they have established trade routes. While you are estimating the GDP for 2017, a new set of tables have arrived, and we witness that GDP has reduced significantly. King of Ferrara is worried. Please help him to find out the reason for the dip in GDP using expenditure method. Use the numbers to justify your

Interest Payments 110

Consumption 500

Wages and Salaries 270

Depreciation costs 50

Exports 120

Rental income 250

Net Indirect taxes (Taxes- subsidies) -170

Gross fixed capital formation (Investment) 250

Net foreign Income -100

Profits 150

Government Expenditure 200

Imports 290

ii) The GDP at current prices of the country in 2019-20 is estimated at 1335600 crores and the GDP at constant price for the year 2019-20 is estimated at 1134500 crores.

The nominal GDP of 2018-19 was estimated at 1254800 crores while the GDP at constant price for 2018-19 was 1035400 crores.

Please calculate the GDP deflator for both years and the rate of change in prices between 2018-19 and 2019-20. Show calculations and formulas.

Answer 1

Solution a) There are two mwthods used for GDP estimation:

• Expenditure approach method
• Income approach method

Formula for Expenditure approach method:

GDP= C + G + I + (X - M)

Where, C= Consumption; G = Government spending; I = Investment; X = Exports; M = Imports

Formula for Income approach method:

GDP = NI + Indirect Business Taxes + Depreciation

NI = W + R + i + PR

Where, W = Wages and Salaries; R = Rental income; I = Interest Income; PR = Profit

Solution b):

Following Data are provided for country Ferrara economy:

GDP Estimation using Expenditures Approach Method:

Interest Payments	170
Consumption	500
Wages and Salaries	250
Depreciation costs	50
Exports	120
Rental income	320
Net Indirect taxes ( taxes- subsidies)	-110
Gross fixed capital formation (Investment)	250
Net foreign Income	-280
Profits	240
Imports	90
Government Expenditure	200

GDP Estimation using Income Approach Method:

Formula for Income approach method:

GDP = NI + Indirect Business Taxes + Depreciation

NI = W + R + i + PR

All the necessary data used for GDP estimation using expenditure approach method has been provided in table. Puting all values in GDP formula:

NI = 250 + 320 + 170 + 240 = 980

GDP = 980 + (-110) + 50 = 920

GDP estimation of Country Ferrara using Income approach method is 920.

GDP Estimation using Expenditures Approach Method:

Formula for GDP estimation using expenditure approach method is:

GDP= C + G + I + (X - M)

All the necessary data used for GDP estimation using expenditure approach method has been provided in table. Puting all values in GDP formula:

GDP = 500 + 200 + 250+ (120 - 90) = 980

GDP estimation of Country Ferrara using expenditure approach method is 980.

Solution b) Part-2:

Due to change in economic situation of country Ferrara, economic data has been changed. New economic data are as follows:

Interest Payments	110
Consumption	500
Wages and Salaries	270
Depreciation costs	50
Exports	120
Rental income	250
Net Indirect taxes ( taxes- subsidies)	-170
Gross fixed capital formation (Investment)	250
Net foreign Income	-100
Profits	150
Imports	290
Government Expenditure	200

Formula for GDP estimation using expenditure approach method is:

GDP= C + G + I + (X - M)

All the necessary data used for GDP estimation using expenditure approach method has been highlighted in table. Putting all values in GDP formula:

New GDP Estimate = 500 + 200 + 250 + (120 - 290) = 780

This new set of Data reveals that GDP of Country Ferrara is falling from 980 to 780.

Reason for the dip in GDP: Due to discovery of new set of economies Ravenna, Liguria and Ancona and establishment of trade routes, imports are increased surprisingly. Imports before this discovery was 90 but after discovery rises to 290 which is 322.22 % rise. This import rise causes trade deficit and the net exports which was earlier in surplus of 30 becomes in deficit of 170. This rise in import from 90 to 290 is the main reason for dip in GDP.

Solution: ii) GDP deflator Formula is:

GDP Deflator for Year 2019-20:

GDP Deflator = (1335600/1134500)*100 = 117.725

GDP Year 2019-20 (In crores)
GDP at Current Price	1335600
GDP at Constant Price	1134500
GDP Deflactor	117.7258704

GDP Deflator for Year 2018-19:

GDP Deflator = (1254800/1035400)*100 = 121.2

GDP Year 2018-19 (In crores)
GDP at Current Price	1254800
GDP at Constant Price	1035400
GDP Deflactor	121.1898783

Rate of change in prices between 2018-19 and 2019-20:

Since we know that GDP deflator is measure of inflation or deflation i.e. change in price.

• Rate of change in prices in 2018-19 is 21.2%.
• Rate of change in price in 2019-20 is 17.72%