ECO403 Macroeconomics Assignment 1 Solution Spring 2013

Gambia is a country located in West Africa. It is surrounded by Senegal, apart from a short strip of Atlantic coastline at its western end. It is the smallest country on mainland Africa. Major exportable products are fish, cotton, peanuts and peanuts products and its exports partners are Hong Kong, Spain and France while importable items are fuel, machinery and manufacturing. Agriculture accounts for 25% of Gross Domestic Product and employs 70% of the total labor force. Hypothetical data on growth rate, inflation, population and labor force of Gambian economy for year 2007 and 2008 is given below:

Years Growth rate Inflation rate Population Labor force Unemployed

2007 4.7% 7% 900000 700000 79000

2008 5.1% 7.2% 1000000 800000 49000

Suppose after analyzing data for the year 2007, economists of Gambia suggested to work on exportable industries in order to have better growth rates in upcoming years. This strategy changed the overall economic situation and components of Gross Domestic Product (GDP) for year 2008. Comparative statistics of the economy of Gambia for both years is given below:

Years Consumption Expenditures (Millions Rupees) Investment Expenditures (Millions Rupees) Government expenditure (Millions Rupees) Exports (Millions Rupees) Imports (Millions Rupees)

2007 1700 100 700 250 450

2008 1900 150 900 450 750

Due to this strategy, not only exports of Gambian economy increased but unemployment rate also decreased. This decrease in unemployment rate compelled the other sectors to restore and the concomitant repercussions were more industry, production, investment, consumption particularly and improved living standard generally.

Requirements:

With the help of above data, calculate Gambian economy’s:

a. Gross Domestic Product (GDP) for year 2007.

Solution:

a. Gross Domestic Product (GDP) for year 2007.

Y = C + I + G + NX (Net Export)
b. Net exports (NX) for the year 2008.

Net Export = Export – Import

c. Unemployment rate for the year 2007 and 2008.

unempolyment rate formula = number of unempolyed/labor force*10

d. GDP deflator for the year 2008 if real GDP and Nominal GDP for this year are RS.2500 million and Rs.2650 million respectively.

GDP Deflator = Nominal GDP / Real GDP x 100