ECS2603 Exam Pack.

SUGGESTED SOLUTIONS FOR 2015 MAY/JUNE Question A1 Gross domestic expenditure Plus exports of goods and services Less imports of goods and services Equals Expenditure on gross domestic product (GDP @ market prices) The diifference between basic prices, factor cost and market prices can be ascribed to:  These three sets of prices that can be used to calculate GDP.  However market price are used to calculate GDP according to the expenditure method while basic prices are used when production (value added) method is applied. Lastly factor cost is used when the income method id followed. NB** These three methods of calculating GDP will yeild the same result merely if the same set of prices is used in all the calculations. Question A2 a) 442 169 − 435 389 1 782 061 × 100 = 0.38% Shows an increase of 0.38% b) 1 782 061 − 1 814 521 1 814 521 × 100 − 1.79% The negative sign represents a decline in the annual real GDP from 2013 to 2014. Question A3 a) Real interest rate = Nominal interest rate – Inflation 6.5% - 5% = 1% b) % point change is simply the difference between the final and initial values 5% - 10% = - 5% negative sign represents the decline thus a decrease of 5% point c) % change is the difference between the final and initial values divided by the initial value 6 − 5 5 × 100 = 20% d) NB** 100 Basis points = 1% 9.15 − 8.65 8.65 × 100 = 5.78% Therefore 5.78% to basis points = 578 Question A4 1. SAVING  Refers to the amount left over when the cost of a person's consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time  Also to the difference between income and expenditure. 2. The trend  Indicates the general direction in which the indexes that were used in the business cycle, move.  The trend line usually has a positive slope because the production capacity of a country increases over time. 3. Business Cycle  Refer to successive periods of increasing (expansion/upswing) or decreasing (contraction/downswing) economic activities.  Also known as successive periods of economic fluctuations and relate to changes in business conditions 4. REFERENCE CYCLE  refers to a full cycle in aggregate economy activity  In this case that is when people want to know whether the economy is in an expansionary or in a recession