THE CIRCULAR FLOW MODEL, NATIONAL ACCOUNT AGGREGATES AND THE MULTIPLIER QUESTIONS AND ANSWERS GRADE 12

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Activity 1
Study the diagram below and answer the questions that follow:
1
1.1 Use the information below and calculate the values A – G: (7)
Total production R25 000     Income Taxation R 5 000
Savings R4 000                    Imports R 3 700
1.2 Explain the impact of an increase in income taxes on the level of production. (3)
1.3 Calculate the total leakages (L) in the above diagram. (4)
1.4 Give the identity (equation) used to represent GDP in an open economy. (2)
1.5 If a country has a marginal propensity to consume of 0.1, calculate the value of the multiplier. (4)
[20]

Answers to activity 1
1.1 A – R20 0003
B – R25 0003
C – R5 0003
D – R4 0003
E – R16 0003
F – R3 7003
G – R12 3003 (7)
1.2 Leads to a decline in production333 (3)
1.3 S + T + M3
R4 000 + R5 000 + R3 7003
R12 70033 (4)
1.4 C + G + I + (X – M)33 (2)
1.5 M = 1/(1 – mpc)3
= 1/(1 – 0,1)3
= 1/0.93
= 1.13 (4)
[20] 

Activity 2
Study the following data and answer the question that follows:

Compensation of employees R1 086 907; Final consumption expenditure by
households R1 472 824; Net operating surplus R728 426; Final consumption
expenditure by government R504 169; Taxes on products R245 198;
Subsidies on products R3 113; Taxes on production R38 173; Subsidies on
production R 5 092; Gross capital formation R467 878; Exports of goods and
services R657 113; Imports of goods and services R667 740; Consumption
of fixed capital R332 824; Primary sector R278 518; Secondary sector
R466 749; Tertiary sector R1 435 971. 

1. Determine the gross domestic product at market prices according to the production method. [10]

Answer to activity 2
1. Primary sector R 278 518
Secondary sector R 466 749
Tertiary sector R1 435 971
Gross value added at basic prices 3 2 181 238
Plus taxes on products R 245 198 
Less subsidies on products R 3 113 
Gross domestic product @ market price R2 423 323
[10] 

Activity 3
Refer to Table 1.3.2 (income method) and answer the following questions:

  1. Which financial institution is responsible for the recording and publishing of GDP figures in South Africa? (2)
  2. Explain the concept ‘subsidies on products’. (3)
  3. Give TWO examples of taxes on products. (4)
  4. Calculate the consumption of fixed capital in 2009 as a percentage of GDP at market price. Show all calculations. (4)
  5. What is the difference between 2007 and 2011 concerning the GVA @ factor cost? (2)

Answers to activity 3

  1. SARB 
  2. Direct payments by government3 to the producer3 to decrease price of a product, e.g. government subsidy on bread.
  3. VAT Import duties
  4. 332 584/2 398 152 × 100% 33 = 13.9%
  5. 2 631 227 – 1 764 090 = 1 258 658

Activity 4
Two key national accounts conversions
A. How to convert domestic totals to national totals:

  2005  2007 2009   2011 
GDP @ MARKET PRICES  1 571 082  2 016 185   2 398 155  2 964 261 
PLUS: Primary income from the rest of the world  29 550 48 448  34 075  38 118
MINUS: Primary income to the rest of the world  60 975 117 266 87 593 104 689
GNP @ MARKET PRICES  1 539 657 1 947 367 2 344 637 2 897 690

Table 1.3.4: How to convert domestic totals to national totals
PLEASE NOTE! Table 1.3.4 shows you how to apply the conversion of domestic figures to national figures and vice versa. You must learn these conversions.
Study Table 1.3.5 below and answer the questions that follow.

NATIONAL ACCOUNT AGGREGATES  R MILLIONS 
Final consumption expenditure by households  1 473 490
Final consumption expenditure by government  505 040
Gross capital formation  467 878
Residual item  –18 092
Gross Domestic Expenditure (GDE) 2 428 316
Export of goods and services  657 113
Import of goods and services  677 740
Expenditure on GDP at market prices A

Table 1.3.5: National account aggregates

  1. Explain the concept gross capital formation. (2)
  2. Calculate the value of A. Show all calculations. (4)
  3. Differentiate between GVA at basic prices and Expenditure on GDP at market price. (3)
    [9]

Answers to activity 4

  1. Expenditure on assets used repeatedly in the process of production /Increase in the stock of capital  (2)
  2. GDE = 2 428 316 
    + Exports = 657 113 
    – Imports = 677 740 
    R2 407 689m 3 (4)
  3. GVA at basic prices is calculated using the production method and is usually less than Expenditure on GDP at market prices.
    To convert GVA at basic prices to Expenditure on GDP at market prices; subtract subsidies on products; add indirect taxes on products.(3)
    [9]

Activity 5
Study the graph below of the Keynesian model in a two-sector economy where the consumption function is given by C = c0 + c(Y) and answer the questions that follow.
2

  1. Define the term multiplier. (3)
  2. With reference to the graph, name the TWO sectors involved in deriving the macro-economic multiplier. (4)
  3. Indicate what is represented by the dotted line. (2)
  4. What is the value of autonomous consumption for the original consumption function? (2)
  5. Suppose the marginal propensity to save (MPS) = 0.4. Use the multiplier formula to calculate the eventual change in aggregate income, if there was an injection of R10 billion into the economy. Show ALL the calculations. (6)
  6. Describe the relationship between the mpc and the multiplier. (3)
    [20]

Determine the size of the multiplier first.

Answers to activity 5

  1. The multiplier shows how an increase in spending (injection) produces a more than proportional increase in national income (3)
  2. Household Business (4)
  3. Indicates all points where income = expenditure / 45º line / Keynesian equilibrium  (2)
  4. 20 bn (2)
  5. M = 1  =   1    = 2.5
         mps   0.4
    2.5 x 10 bn P = 25 bn. (6)
  6. The larger the marginal propensity to consume (mpc) the bigger the multiplier and vice versa (3)
    [20] 
Published in Economics Grade 12 Study Guides and Notes

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