National Income Accounting

(i) The UK national income account [see UK National Accounts: The Blue Book 2007] for 2006 shows the following simplified figures (in £ million at current prices): Private con-sumption expenditure (incl. non-profit institutions serving households [NPISH]): 828,081; Government consumption expenditure (individual and collective): 286,812; Gross capital formation (incl. changes in inventories): 238,531; Fixed capital consumption: 133,936; Ex-ports of goods and services: 369,691; Imports of goods and services: 424,128; Net factor income from the ‘rest of the world’ [ROW] (net of indirect taxes paid to plus subsidies re-ceived from ROW): 17,334; Indirect taxes on domestic products and imports minus subsi-dies (including taxes paid to and subsidies received from ROW): 144,663. The figures also indicate a statistical discrepancy between output measure of GDP and expenditures ap-proach of £m 635 (Hint: If c is the difference between two numbers a and b, how would you write this as an equation?).

Using these numbers calculate:

(a) Gross domestic product (GDP) at market prices according to the expenditures approach;

(b) Gross domestic product (GDP) at market prices according to the output approach;

(c) Gross national product (GNP) at market prices (taking GDP by its output measure);

(d) Net national product (NNP) at market prices;

(e) National income (NNP at basic prices). (15 marks)

(ii) Suppose the government wants to improve on its income from taxes by increasing taxes on cigarettes from £1 to £2 per pack, which raises the price per pack from £4 to £5. The government, however, is uncertain about the price sensitivity of the demand for cigarettes. Assuming the (direct) price elasticity of this demand to be constant in the relevant domain, it considers two extreme cases of elasticity to explore the range of possible effects: (a) -0.2; (b) -2.0. Calculate the percentage change of total taxes on cigarettes for both scenarios (Hint: The increase in price reduces the demand for cigarettes. Given this decrease in de-mand and the increase in tax per unit, you can calculate the percentage change in overall taxes.)

The question above is a pure calculation exercise. However you should be able to explain you analytical approach.

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