ECO401 Economics Assignment 1 Solution Spring 2014

The Case:
The socialist market economy of China is the world’s second largest economy by nominal
GDP and by Purchasing Power Parity (PPP) after the United States. It is the world’s
fastest-growing major economy, with growth rates averaging 10% over the past 30 years.
China is also the largest exporter and second largest importer of goods in the world. On a
Per Capita Income basis, China ranked 83rd by nominal GDP and 93rd by GDP (PPP) in
2013, according to the International Monetary Fund (IMF).

In January 1985, the State Council of China approved to establish a SNA (System of
National Accounting), use the Gross Domestic Product (GDP) to measure the national
economy. Suppose the estimates show the following data of nominal and real GDP of
China and annual GDP growth rate.

Years GDP (Constant)
(Billion US$)
GDP (Current)
(Billion US$)
GDP Growth
Rate (Annual %)
2006 254352.14 271295.27 12.7
2007 290471.29 349451.32 14.2
2008 318356.99 452182.98 9.6
2009 347645.10 499125.99 9.2
2010 383803.60 593529.17 10.4
2011 419493.54 732199.66 9.3
2012 452214.35 822710.48 7.8
2013 462550.52 822152.35 8.5

From the information given in the above table, calculate the following:

a) GDP Deflator for each year.
b) Average growth rate from year 2010 to 2012.

Now consider the following hypothetical data of China’s Exports, Imports, Savings,
Investment, Government Spending and Taxes.
Years Exports
(Current)
(Billion
US$)
Imports
(Current)
(Billion
US$)
Savings
(Current)
(Billion
US$)
Investment
(Current)
(Billion
US$)
Government
Spending
(Current)
(Billion
US$)
Taxes
(Current)
(Billion
US$)
2006 681308 561649 107494.15 905955.32 322219.44 144945
2007 859607 663503 137456.99 110376.27 382581.35 128908
2008 110785 817033 176592.70 136319.62 471554.58 154707
2009 132758 985710 203868.91 184424.71 601222.61 201005
2010 111615 880969 262877.01 229434.63 669677.91 230941
2011 147623 123069 308008.64 271957.16 788778.96 288528
2012 180590 156985 371735.67 333461.67 977780.28 336850
2013 189020 159253 384152.59 335213.52 952842.18 346251

From the information given in the above table, calculate the following for each year:

c) Injections
d) Withdrawals

e) Savings are much more important for any economy. Keeping in view the
importance of savings, suppose every one in Chinese economy starts saving. Is this
act rational? What will be the impact of this higher saving on China’s overall
output? Discuss in the light of Keynesian Paradox of Thrift.
(Marks: 8+2+8+8+4)

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