49003 ECONOMIC EVALUATION ASSIGNMENT HELP
UNIVERSITY OF TECHNOLOGY SYDNEY
Faculty of Engineering and Information Technology
49003 ECONOMIC EVALUATION
2. The Answer Sheet for this assignment should be uploaded using the appropriate link on UTSOnline.
Country X is blessed with large reserves of natural resources, a spectacular physical landscape and a moderate climate. It is inhabited by a well educated and industrious workforce and has a parliamentary form of democracy.
The people in the country enjoy an impressive standard of living. Some concerns have however emerged in the recent times about the current state of the economy (Annexure 1 provides select information about broad economic settings for the country). The main factors that seem to have contributed to these concerns include: excessive reliance on primary commodities; perceptible shifts in international trade patterns – from primary commodities to high value-added products and services, low business and consumer confidence, low personal savings, inadequate productive investments, large national debt, disproportionately high imports, and a global economic downturn. The future economic prospects for the country do not look promising unless some concerted measures are taken to rectify the situation.
While several such measures (let us call them ‘proposals’) are presently being considered by the government, a general consensus appears to be building around two proposals – Proposal A and Proposal B. Both proposals relate to investing in the infrastructure sector. Each of these proposals is likely to cost $30bn (2013 prices).Further, the government has decided that these projects will be implemented in joint (i.e., public-private) partnership. The underlying argument in support of these investment proposals is that they will stimulate economic activity and affect economic outcome in a multiplicative manner.
These proposals have generated considerable community-wide interest. Rightly so. The investments are large and their economic and societal implications are likely to be significant too. A careful evaluation of these proposals is therefore necessary. In view of the renown of UTS MEM graduates, you have been invited to evaluate these proposals.
You, of course, accept the invitation!
Your task is simply to write answers to various questions in the Answer Sheet (provided separately).
• You must provide the background details (i.e., select calculations) for various answers provided by you in the answer-sheet, in an Annexure (no more than two pages). The minimum permissible font size for the Annexure is 12 (Times Roman or equivalent).
• The completed answer-sheet must however be a stand-alone document (i.e., the reader should be able to understand the entire logic behind your reasoning without needing to refer to the Annexure.
• All answers (including Annexure) must be type-written (i.e., no hand written responses).
• There is no tolerance on specified word/page limits. Any written material beyond these limits will not be marked.
• Please tick (?) only one box wherever multiple choices are provided.
STATUS OF THE ECONOMY
• Although the country produced several types of commodities (goods and services) in the year 2008, but this country’s Central Statistics Office has grouped such commodities into five broad categories (A to E) for the purpose of estimating private consumption expenditure for the year 2008.
Commodity Production Price
(bn units) ($/unit; 2013 prices)
A 20 10
B 15 10
C 5 20
D 25 6
E 20 5
Further, during 2008, $30bn worth of shares were purchased by the citizen of the country. Total corporate profits for the year were $200bn, and dividends on shares, $20bn. The government also spent $10bn on social-security benefits, provided $20bn of subsidies to the poor. The government received $50bn of direct taxation, and $60bn of indirect taxation, revenue during the year. The entire capital employed in the economy during the year was raised through borrowing and equity. The wages and salaries for this year amounted to $140bn, and $200bn was the cost of rent. $150bn of net investments was made by the country during the year, and the assets depreciated by $50bn in this year. Net exports for the year were $0bn (all estimates for the year 2008 are expressed in terms of 2013 dollars.)
• For the year 2013, the government’s direct taxation revenue was $70bn. The government spent $20bn on social-security benefits. The business paid, during the year, $100bn of rent from employing land for various productive activities. The cost of employing capital was $150bn for this year (all prices are in 2018 dollars). Other particulars for 2013 (at 2018 prices; expressed in $bn) include:
Total government transfer payments 100
Private consumption expenditure 500
Net exports (deficit) (100)
Net investment 150
Corporate profits 150
Government productive expenditure 100
• National Income data for the year 2018 is shown below.
Estimated National Income data for 2018 ($bn; 2008 prices)
Government productive expenditure 200
Net exports (deficit) (60)
Direct taxes 40
Interest on capital 100
Corporate profits 210
Private consumption expenditure 600
Government transfer payments 70
GDP at factor prices 770
Gross Investment 110
Indirect Taxes 80
• While it is difficult to precisely predict future economic growth, the country’s leading economists believe that if no measures are taken to revitalize the economy in 2018, the economy will become stagnant and its effect would be reflected in the GDP for the year 2023. In order to estimate the GDP for 2023, the economists have aggregated the economy into three major sectors as shown below:
i+w+r+p = 140 s = 540 f
i+w+r+p = 318 s f =288
i = interest; w = wages/salaries; r = rent; p = profit;
m = intermediate inputs; s = market value of total output; f = market value of output sold to final users.
Note: All values are in billions of dollars, expressed in 2018 prices.
Other select information for the year 2023 (in 2023 prices) is noted below:
Gross National Expenditure (GNE) 1000
Direct taxes 100
Indirect taxes 62
Total Imports 200
Transfer payments 200
• If however measures are taken to revitalize the economy (in this instance – by investing in Proposal A or Proposal B) in 2018, the GDP for the year 2023 could be affected – due to the multiplicative effect of investments. For Proposal A, for example, GDP will be roughly equal to the ‘without investment GDP’ for 2023, 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:
Table 1:Income and Savings (Real $)
Year Average Average
1 50,000 0
2 51,000 (-) 500
3 52,000 (-) 1,000
4 53,000 (-) 1,500
5 54,000 (-) 2,000
(-) denotes a negative value
• The GDP of the country, inclusive of the multiplicative effect of investment, for Proposal B, for the year 2023, can be estimated from the following simplified representation of the country’s economy: The total value of the output produced by all firms in the country is estimated to be $900bn. Of this output, $50bn worth of output is expected to be kept aside by the firms to build inventories for the future, and $100bn will be sold to other firms as intermediate inputs. In that year, the production processes are estimated to consume $200bn worth of intermediate inputs (raw materials), and the corporate sector is estimated to suffer a loss of $180bn.The indirect taxes in that year are estimated to be $134bn, and wages and salaries, $300bn. Further, the government will pay $50bn of assistance to the economically disadvantaged in that year. Annual rent is expected to be $100bn. All these estimates are in 2013 prices.
• Assume that the investments in either of the proposals will not cause any inflationary pressures.
• With 2013 as the base year, the GDP deflators for the various years can be estimated from information provided in Table 2. In this table the country’s statisticians have grouped the entire economic activity of the country into three hypothetical commodities (A, B and C).
The levels of output and price of each commodity for the years 2008, 2013, 2018, and 2023 are shown in the table. Assume that the outputs produced are entirely purchased by the final users.
Table 2: Outputs and Prices
Commodity 2008 2013 2018 2023
Output Price Output Price Output Price Output Price
A 10 20 10 10 15 12 20 15
B 10 16 20 16 15 18 25 24
C 20 20 30 20 35 25 20 5
Output – Physical units; Price – $/unit of physical output;
Notes: Please note that this table is meant exclusively for developing estimates of GDP deflators. Various values for 2023 shown in this table represent ‘No Investment’ situation.