Question

From the table below calculate GDP via expenditure and income methods.

                        Does Statistical Discrepancy exist (difference in GDP via both the methods)?

b          Calculate GNP.

c          Calculate national income and disposable personal income. What percentage of national income is disposable personal income?

d          What percentage of disposable personal income is consumption expenditure?

                                                                                                            (2+1+2+1)

Item	Amount (trillions of dollars)
Wages	6.0
Government expenditure	2.0
Interest, rent, and profit	2.4
Consumption expenditure	7.4
Investment	1.6
Net exports	0
Indirect taxes less subsidies	0.7
Retained profits	1.6
Transfer payments	1.3
Personal income taxes	1.1
GNP	10.5
Depreciation	1.3

Answer 1

Ans: GDP using the Expenditure Method

GDP_MP (Market Price) = Consumption Expenditure + Government Expenditure + Investment + Net Exports

GDP_MP = 7.4 + 2.0 + 1.6 + 0

GDP_MP = 11.0 (trillion of dollars)

GDP using Income Method is the sum of all the factors income received by the factors of production

NDP_FC(Factor Cost)  = Wages + Interest, rent and profit + Retained Profits

NDP_FC  = 6.0 + 2.4 + 1.6

NDP_FC = 10(trillion of dollars)

GDP_FC =NDP_FC + Depreciation

GDP_FC = 10 + 1.3 = 11.3 (trillion dollars)

To go to Market Price from Factor Cost we add Net Indirect Taxes

GDP_MP = GDP_FC + NIT (Net Indirect Tax)

GDP_MP = 11.3 + 0.7 = 12 (trillion dollars)

(b) Yes there is statistical Discrepancy because there is difference in GDP calculated by bith the methods.There is difference of 1 (trillion dollar) in the calculation of GDP

We will do all calculations on the basis of market price now onwards.

GNP is given to us 10.5 whereas GDP is 11 trillion dollar at the Market price

Thus GNP_MP = GDP_MP + Net Factor Income From Abroad (NFIA)

10.5 = 11 + NFIA

NFIA = - 0.5 (trillion of dollars)

(c) National Income is the income that is received by the factors of production including NFIA and it is GNP which is 10.5 which is given to us

National Income = Domestic Income + NFIA

National Income = 11 +( - 0.5)

National Income = 10.5

To calculate the Personal Disposable Income fist we have to calculate Private incomeand then Personal Income

Private Income = NDP_MP + NFIA + Transfer Payments

Private Income = 9.7 + (-0.5) + 1.3

Private Income = 10.5

Personal Income = Private Income - Retained Earnings

Personal Income = 10.5 - 1.6 = 9.9

Personal Disposable Income = Personal Income - Direct Personal Taxes

  = 9.9 - 1.1 = 8.8 (trillion dollars)

GDP_MP - Depreciation = NDPMP

11 - 1.3 = NDP_MP

9.7 = NDP_MP

To calculate the percentage of national income the disposable income we get = Personal Disposable Income/ National Income *100

= 8.8 / 10.5 = 83.8 %

Thus 83.8 % of national income is personal disposable income

(d) Consumption Expenditure = 7.4

Personal Disposable Income = 8.8

Consumption Expenditure with respect to the perentage of Personal Disposable Income = 7.4 / 8.8 * 100 = 84.09%

Thus 84.09 % of Personal disposable income is consumption expenditure