ECO401 Economics Assignment 2 Solution Fall 2012

The case

By 1949, continuous foreign invasions, frequent revolutions, restorations and civil wars
had left the country of China with a fragile economy with little infrastructure. After three
decades of central planning, it was time for China to emerge from isolation and become
an important player in the world economy. Economic reforms since 1978 have taken
China to a new trajectory of growth. Evolution into a controlled-open economy has
synchronized the movement of macroeconomic variables like growth rate, inflation, and
exchange rate, with the rest of the world. Any policy change in China now has its impact
on the world economy. China is the world’s second largest economy in terms of nominal
GDP and Purchasing Power Parity after USA. It is the world’s fastest growing major
economy, with growth rates averaging 10% over the past 30 years. Suppose in year 2000,
Chinese consumption was characterized by the equation, C = 450 + 0.80Y. Government
expenditures were Rs.350 million and total investment was about Rs.220 million. At that
time, China paid Rs.250 million as import payments and earned Rs.350 million as export


Part A:
With the help of above information, calculate the following for Chinese economy for the Year 2000.
a) Equilibrium Output Level.
b) Consumption Level.
c) Saving Level if Taxes are Rs.350 million (By using Injections-Leakages


part B:
Suppose in the next Year 2001, China produced following goods and services. Total
output, unit values and total money values of these goods and services are as under:


Goods and
Total output Unit values / prices Total money
value (Rs.
1 Wheat 150 Tons Rs. 1 million / tons 150
2 Rice 180 Tons Rs. 1 million / tons 180
3 Coal 50 Tons Rs. 1 million / tons 50
4 Iron 70 Tons Rs. 1 million / tons 70
5 Radio 15 Thousand Rs. 1 thousand / unit 15
6 TV set 16 Thousand Rs. 5 thousand / unit 80
7 Doctors 20 Thousand Rs. 1 million / doctor
per annum
8 Engineers 150 Thousand Rs. 1 lac / engineer
per annum


Assume depreciation cost was Rs.35 million in that year. Calculate:
a) Gross National Product (GNP)
b) Net National Product (NNP)

Provide step wise calculation in Part A and B with the help of formulas.