Economic evaluation


• Each Proposal A and B cost $20bn (2012 prices).
• A to E represents all commodities in 2007

During 2007: shares purchased by citizen $50bn, total corporate profits $500bn, government social-security spending $30bn, subsidies to the poor $50bn, citizen received $7bn dividends on shares, direct taxation revenue government received $100bn. Entire capital employed in the economy was raised through borrowing and equity. Total wages $150bn, and $50bn was the cost of rent. Net investments $250bn, net exports $0bn (all estimates above are in 2012 dollars.)
• For 2012, direct taxation revenue $90bn, government social-security spending $40bn, business paid $200bn rent and $250bn wages, cost of capital$ 200bn (all prices are in 2007 dollars)

• For 2017:
• To estimate the GDP for 2022, the economy were aggregated into three major sectors:

• Investing in Proposal A or B in 2017, GDP for 2022 could be affected by multiplicative effect of investments. For Proposal A, for example, GDP will roughly equal to the ‘without investment GDP’ for 2022, plus investment inclusive of the multiplicative effect. The average value of the investment multiplier for investment in Project A can be determined from the following information:

• GDP, including investment multiplicative effect, for Proposal B, for 2022, can be estimated from the following information: Total market value of output sold to final users $1,655bn. Of the total output, $100bn output is expected to be kept aside to build inventories for the future, $150bn will be sold to other firms as intermediate inputs. In that year, production processes consume $400bn intermediate inputs (raw materials), corporate sector suffer a loss of $100bn. Indirect taxes $100bn, wages $250bn. Government pay $100bn to economically disadvantaged. All these estimates are in 2022 prices.
• Assume investment in either of the proposals will not cause any inflationary pressures
• 2017 as the base year, the GDP deflators can be estimated from Table 2. ABC includes all commodities. Assume outputs produced are entirely purchased by the final users.

Note: This table is meant exclusively for developing estimates of GDP deflators. Values for 2022 in this table represent ‘No Investment’ situation.



Which proposal will you recommend? (Y/N) Why? (Within 10 words)
Will you recommendation change if for proposal B, $150bn worth of output is not sold to other firms as intermediate inputs and is instead sold to the final users? (Y/N) Why? (Within 10 words)
Will you recommendation change if, say, due to unforeseen Global Financial Crises, the economy experiences a severe deflation and – as a result – the GDP Deflator for 2022 becomes 10? (Y/N) Why? (Within 10 words)
Will your recommendation change if, for Proposal A, people saved 50% of the annual increases in their incomes as noted in Table 1 of the assignment? (Y/N) Why? (Within 10 words)
What value of ‘Marginal Propensity to Consume’ is implicit in your calculations for proposal B? Present your calculations within two steps.
How much investment (expressed in 2017 dollars) will be needed (currently investment is $20bn, expressed in 2012 dollars) in order to make the GDP of Proposal A, in 2022, to be t $200bn more than ‘without investment’ GDP in 2022? Present your calculations within two steps.





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