Sept 2020 - Q24

[ominming]

24 You are given the following data for an economy:

£ million​

Consumer expenditure (including indirect taxes) 120
Investment 60
Government expenditure (including transfer payments) 70
Exports 40
Imports 30
Net income from abroad 20
Indirect taxes 10
Capital depreciation 20
Transfer payments 10​

The value of the economy’s Gross National Income at market prices is:​

A £250 million.
B £260 million.
C £270 million.
D £280 million.​

The correct answer is C.​

I understand that GDP = C_d + I + G + (X - M) and GNY = GDP + net income from abroad.
Since we are not calculating NNY, capital depreciation is ignored.
May I know specifically what to do with the transfer payments and indirect tax (when it is included in any of the categories and when it is not)? Can anyone show the calculation as well?

Thank you in advance.

 

[Dave Johnson]

Using the expenditure method, gross domestic product (GDP) at market prices can be calculated as follows:

GDP (market prices) = C + I + G + X - M
= 120 + 60 + (70 - 10) + 40 - 30
= 250

Remember that GDP should only include expenditure on goods and services produced, so government expenditure on transfer payments should not be included. Also, if consumer expenditure includes sales taxes, then the figure given is at market prices, ie prices paid in the shops.

Gross national income (GNY) can then be obtained by adding net income from abroad:
GNY (market prices) = GDP (market prices) + net income from abroad
= 250 + 20
= 270

Dave

 

[ominming]

Thank you very much for the explanation.