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49003 Economic Evaluation

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49003 Economic Evaluation

0 Download2 Pages / 419 Words

Course Code: 49003
University: University Of Technology Sydney

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Country: Australia

Question:

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.
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 $20bn (2012 prices). Further, the government has decided that while
the money for the project will be mobilized by the government, the projects will be implemented (i.e., built and operated) by the private sector. The underlying argument in support of these investment proposals is that they will stimulate economic activity and affect economic outcome in a multiplicative manner.
Your task is simply to summarize (in your own hand-writing) the results of your analysis in the answer-sheet provided separately (you would be pleasantly surprised to discover how elegantly you are still able to write!).
Will your recommendation change if Proposal B results in hyper-inflation?
How much investment (expressed in 2012 dollars) will be needed in (currently investment is $20bn, expressed in 2012 prices) in order to make the GDP in 2022, 20 percent better than GDP in 2017 (without investment). Please present your calculations here (no more than two steps of calculations).
Will you recommendation, with 2017 as the base year, change if for proposal B, the corporate sector, in the year 2022 makes a profit of $200bn instead of a loss of $200bn?
What value of ‘Marginal Propensity to Save’ is implicit in your calculations for proposal B?
Is the proposal, in this assignment, to invest in infrastructure based on Keynesian or Neoclassical reasoning?
Will your recommendation change if, for Proposal A, people save every dollar of the yearly increases in their disposal incomes as shown in Table 1 of the assignment?

Answer:

Summary of the economic performance

Without Investment

Nominal GDP – is a monetary measure of goods and services produced in an economy using the current prices of the year it is calculated(Mankiw, 2007).

2007
Commodity A 20*15 = 300
Commodity B 16*25 = 400
Commodity C 20*17 = 540
Total production (nominal GDP) = 300+400+540 = 1240
2012
Commodity A 10*10 = 100
Commodity B 16*15 = 240
Commodity C 20*20 = 400
Nominal GDP = 100+240+400 = 740
2017
Commodity A 12*15 = 180
Commodity B 18*15 = 270
Commodity C 25*35 = 875
Nominal GDP = 180+270+875 = 1325
2022
Commodity A 15*20 = 300
Commodity B 24*25 = 600
Commodity C 5*20 = 100
Nominal GDP = 300+600+100 = 1000

Real GDP – is the nominal GDP adjusted for inflation using the prices of a base year(Mankiw, 2007). In this case, the base year is 2017.

2007
Commodity A 20*10 = 300
Commodity B 16*15 = 240
Commodity C 20*35 = 700
Real GDP = 300+240+700 = 1240
2012
Commodity A 10*15 = 150
Commodity B 16*15 = 240
Commodity C 20*35 = 700
Real GDP = 150+240+700 = 1090
2017
Commodity A 12*15 = 180
Commodity B 18*15 = 270
Commodity C 25*35 = 875
Real GDP = 180+270+875 = 1325
2022
Commodity A 15*15 = 225
Commodity B 24*15 = 360
Commodity C 5*35 = 175
Real GDP = 225+360+175 = 760

GDP Deflator

2007
(1240/1240)*100 = 100%
2012
(740/1090)*100 = 68%
2017
(1325/1325)*100 = 100%
2022
(1000/760)*100 = 132%

With investment A

To consider the effect of government investment in 2017, we will need to calculate the investment multiplier.
Where MPC is the marginal propensity to consume,
Where  is the change in consumption and  is the change in income.
Calculating for MPC,
Year 2 = (51,000 – 50,000)/ (51,500 – 50,000) = 0.67
Year 3 = (52,000 – 51,000)/ (53,500 – 51,500) = 0.5
Year 4 = (53,000 – 52,000)/ (56,000 – 53,500) = 0.4
Year 5 = (54,000 – 53,000)/ (59,000 – 56,000) = 0.33
Average MPC = (0.67+0.5+0.4+0.33)/ 4 = 0.47 ≈ 0.5
Investment Multiplier = 1/(1 – 0.5) = 2
Real GDP with investment A (2107 Prices). Considering investment will be done in 2017, GDP of the previous years will remain the same except for that of 2022 which will be affected by the investment.
2007 = 1240
2012 = 1090
2017 = 1325
2022 = without investment GDP + (Investment*Multiplier)
         = 760 + (20*2) = 760 + 40 = 800
Real GDP with investment B given GDP of 1300 = 1300 + (20*2) = 1340

because it will lead to a higher GDP for the year 2022.
Because hyperinflation will reduce tax revenues, destroy private investments and drive the cost of living so high.
20% increase in 2017 GDP = 1325*120% = 1590

1590 = 760 + (i*2), where i is investment
i = (1590 – 760)/ 2 = $415 billion

because the private sector will have more money to invest hence improve the GDP more.
Marginal propensity to save is the change in income divided by the change in consumption.

It is the reciprocal of MPC. MPS = 1/0.5 = 2

In this case, changes in investment will cause a more than proportionate changes in the GDP. The multiplier effect given by 1/ (1-MPC) gives an effect where the GDP with investment will grow at twice the rate(Mankiw, 2007).
because the people will save but will not invest on the GDP growth.

References
ABEL, A. B., BERNANKE, B., & CROUSHORE, D. D. (2017). Macroeconomics.
CATE, T. (2013). An encyclopedia of Keynesian economics.
DORNBUSCH, R., FISCHER, S., & STARTZ, R. (2014). Macroeconomics.
MANKIW, N. G. (2997). Macroeconomics. New York, Worth Publishers.
TIMLIN, M. F. (2014). Keynesian economics. https://www.deslibris.ca/ID/448174.

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