+923443903583 AS Economics Cheat Sheet @adilusmanzoberi

National Income Formula Sheet

1) Real GDP = Nominal GDP (or Money GDP / Money income) – inflation

2) GDP in nominal terms is the current monetary value, i.e., the total spending on goods and services or
the total value of output with no adjustment ae for the effect of inflation.
Real GDP measures the level of national income adjusted for inflation. Real GDP growth measures
the actual increase in the volume of goods and services produced by a country.
Nominal GDP CPI
CPI (base year)
2010 $2.21 trillion 100 Real GDP = Nominal GDP ×
CPI (current year)
2011 $2.00 trillion 102

Converting nominal data into real data:

100
Real GDP in 2011 = Nominal GDP (2010) ×
CPI (2011)
100
1.961 trillion = 2 trillion ×
102

Nominal GDP CPI

2016 $800 billion 100
2017 $900 billion 120

Price index (base year)

Real GDP in 2017 = Nominal GDP ×
Price index (current year)

100
$750 billion = $900 billion ×
120

GDP deflator is a price index that shows how an average price for all goods and services produced in
an economy change overtime. It simply gives us the price index of the current year representing the
rise in prices.
Nominal GDP
GDP Deflator (2017) = × 100
Real GDP
900
= × 100 = 120 Represents that if prices in 2016 were 100 (index)
750 then the price index now is 120

900 It’s called GDP deflator because it is telling us that nominal GDP is 120%
= $750 (Real GDP)
120% higher so we need to deflate nominal GDP

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A GDP deflator of 120 means that prices are 20% higher than base year.

Nominal GDP 900

Real GDP = → = 750
GDP Deflator 1.2

This means that Real GDP is $750 which is 20% lower than nominal GDP of $900
Real GDP is a better measure of economic growth than nominal GDP as it shows change in the actual
value of goods and services produced after taking inflation into account.

3) GNI (Gross National Income)

GNI = GDP + Net property income from abroad
If net property income from abroad is negative, deduct from GDP to arrive at GNI
Net property income from abroad = inflow – outflow

of all income earned by individuals, firms, and investors working in

another country but are domestic residents
all income earned by foreign individual, firms, and investors
working in domestic country and earning but are foreign residents,
for example, income earned by multinationals (MNCs) in Pakistan
will be deducted from GDP to arrive at Pakistan’s GNI

Net National Income (NNI) = GNI – Capital consumption

Depreciation
Capital consumption or depreciation refers to the value of replacement investment, i.e., replacement
capital goods that have worn out or become out of date due to wear and tear or advances in
technology.

Equilibrium National Income

Withdrawal(s) = Injections(s)
saving + imports + taxes = investment + government expenditure + exports

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4) Gini coefficient
It is a numerical measure of the extent of income inequality in an economy.
Distribution of income Gini coefficient value
Equal income distribution (perfect equal) 0
Unequal income distribution (perfect unequal) 1
Relatively equal Close to 0
Relatively unequal Close to 1
The value of Gini coefficient lies between 1 and 0

A value of 03, 0.2 indicates a more equal distribution of income than a coefficient of 0.5
Similarly, a value 0.9 shows a more unequal income distribution compared to a value of 0.7

Total income tax paid

Average tax rate = × 100
Total income

Change in income tax paid

Marginal tax rate = × 100
Change in income
The marginal rate of tax is the proportion of extra income taken in tax, for example, if a person earns
an extra $100 and extra $30 is paid in tax for that the marginal rate of tax is 30%
30
× 100 = 30%
100

Rule for ART and MRT:

In a progressive tax system, the marginal rate of tax is higher than average rate of tax, similarly, in a
regressive tax system, the marginal rate of tax is less than the average rate of tax. Lastly, in a
proportional tax system, marginal rate of tax equals the average rate of tax

Indirect taxes – Regressive (a smaller % of income is taken in income as it rises)

Takes a higher proportion of income as tax from people on low
incomes

Direct taxes – Progressive

Takes a higher proportion of income as tax as income rises and vice
versa

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5) Converting GDP at factor cost to market price

GDP at factor cost / basic price XXX Market price – price charged to customers
Add: taxes on product (e.g., VAT) XXX Indirect tax increases price hence add it
Less: subsidies on product (XXX) Subsidies decrease price hence deduct it
GDP at market price

GNI and GNY is the same thing, I for income and Y is used for income as well

GNY (or GNI) at market price = GDP at market price + Net factor income from abroad
If net factor income is negative then deduct

NNY (NNI) at market price = GNI – Capital Consumption

6) Unemployment
Number of people employed
Employment rate = × 100
working age population

Number of people unemployed

Unemployment rate = × 100
Total labor force

Total labor force

Labor force participation rate = × 100
Total working age population

Measures of unemployment
Counts as unemployed those who register as unemployed in
Claimant count measure
order to claim unemployment benefits
Involves conducting a survey asking people of they are
Labor force survey measure
employed, unemployed or economically inactive
Students must be aware of the types of unemployment, i.e., structural, frictional, seasonal, cyclical

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 +923443903583 Solved Questions @adilusmanzoberi

Worked CPI
The table shows the individual price indices and the weightages of three goods that make up the price
index
Price index in April 2022
Good Weightage
(April 2021 = 100)
X 0.1 (10%) 102
Y 0.4 (40%) 104
Z 0.5 (50%) 103

Calculate the percentage increase in the overall price index between April 2021 to April 2022

Calculate the weighted price index

X 0.1 × 102 = 10.2
Y 0.4 × 104 = 41.6
Z 0.5 × 103 = 51.5
103.3 Overall weighted price index in 2022

New index (2022) − Old index (2021)

Inflation rate = × 100
Old index
103.3 − 100
= × 100
100

= 3.3%

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Worked Real GDP Question

The table shows the values of nominal GDP and a price index in two different years
Year 2015 2019
Nominal GDP ($ billions) 250 290
Price index 100 110

What was the value of real GDP in 2019 to the nearest $ billion?
Price index (base year)
Real GDP (2019) = Nominal GDP ×
Price index (current year)

100
= 290 × = $264 billion
110

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 +923443903583 Solved Questions @adilusmanzoberi

Q1) The table shows the amount paid in tax by individuals at different levels of income
Income ($) Tax paid ($)
20,000 4000
30,000 5400
40,000 6400
50,000 7000

This tax is an example of:

A) Lump sum tax
B) Progressive tax
C) Proportional tax
D) Regressive tax

Average rate of tax (ART) = Tax paid as a % of income

Tax paid
ART = × 100
Income
Income ($) Tax paid ($) ART
4000
20,000 4000 20% × 100
20000
5400
30,000 5400 18% × 100
30000
6400
40,000 6400 16% × 100
40000
50,000 7000 14% 7000
× 100
50000

Rules:
➢ Progressive tax is one where ART rises when income rises
➢ Regressive tax is one where ART falls as income rises
➢ Proportional tax is one where ART does not change when income rises

The correct answer is option D as ART falls when income rises

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Q) Which of the following is correct for a proportional tax on income?

A) The amount of tax paid increases as income increases

B) The marginal rate of tax is less than the average rate of tax
C) The average rate of tax falls as income rises
D) The average rate of tax is lower than marginal rate of tax

Proportional tax – All income is taxed at the same rate. It is also called flat tax, no matter how much we
earn income tax is always the same.
The average rate of tax is constant at the flat rate, so if the proportional (flat) tax rate is 20%, the average
rate of tax will be 20% as well.
Here the average rate of tax equals the marginal rate of tax as well since any extra income will also be
taxed at 20%.
Based off of the rules/observations we established above, options B and C as incorrect
Option A is the correct answer, although the rate of tax is constant the amount of tax paid will rise as
income rises as the tax rate % will be applied at a higher income.

How to calculate income tax paid

The table shows the marginal income tax rates in an economy in 2016
Taxable income Income tax rates 2016
From $0 to $10 000 0%
From $10 001 to $30 000 10%
From $30 001 to $50 000 30%
From $50 001 and above 40%

How much income tax would be payable by someone earning $40 000 in 2016?
− The income tax rates are given in as marginal tax rates (MRT)
− $40 000 income falls in the third bracket but we will not apply 30% to the income
− We will have to work backwards:
1. Third bracket is $30 001 to $50 000, how much of the total income of $40 000 falls here?
Under this bracket, $10 000 is taxed (40 000 – 30 000) which gives us $3000 in tax.
2. See how much falls in the second income bracket, since $10 000 is already taxed, we are
left with $30 000 to tax under this bracket. (30 000 – 10 000 = 20 000 × 10% = $2000
3. Out of $40 000, $30 000 of his income is already taxed. We are now left with remaining
$10 000, which falls under the first tax bracket and is exempted so no tax.
Total tax paid = 3000 + 2000 = $5000

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Year Money wages CPI

2015 $5000 100
2016 $6000 125

6000−5000
Workers think wages increase by 20% ( × 100) but CPI rises to 125 hence price level goes
5000
up by 25%

Calculate real wages in 2016:

➢ Apply the same formula that is used to calculate real GDP
Price index (base year)
Real wages (2016) = Nominal wages ×
Price index (current year)
100
$4800 = 6000 ×
125
Hence in real terms workers income has fallen by 4% from $5000 in 2015 to $4800 in 2016, real wage
in 2015 is equal to nominal wage in base year.

Analysis:
With an inflation rate of 25%, a 20% rise in nominal wages makes the worker worse off by 4%

Real interest rate = Nominal interest rate – inflation rate

5% = 8% − 3%
-1 = 8% − 9%

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 +923443903583 Unemployment MCQs @adilusmanzoberi

Q1) The table shows data for an economy’s labour market.

million
number of people of working age 42.7

Number of people of working age who are

2.2
actively seeking work, but are not working
Number of people of working age who are
9.4
not actively seeking work

What is the economy’s percentage employment rate, to the nearest whole number?
A) 5% B) 23% C) 73% D) 95%

Number of people of Number of people of

Number of people of working age − working age not actively = working age actively
seeking work seeking work
42.7 – 9.4 = 33.3
Number of people of working age seeking work, out of these some might be employed
and some unemployed.
Technically, this represents your labor force now, since labor force consists of all
those people who are employed or unemployed but are actively seeking work – this
means economically active

Number of people of Number of people of

Number of people of working age − =
working age but not working working age working
33.2 – 2.2 = 31.1 million employed
number of people employed 31.1
Employment rate = × 100 = 42.7 × 100 = 73%
Working age population

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 +923443903583 Unemployment MCQs @adilusmanzoberi

Q2) Which type of unemployment is correctly linked to the description of its cause?
Type of
Description of the cause
unemployment
A Cyclical A change in demand due to holiday period
B Frictional A lack of sufficient information
C Structural A temporary change in consumer expenditure
D Technological A general decrease in the demand for goods

Answer is option B since frictional unemployment consists of people in search for jobs and often
lacking information about job vacancies.

Q3) In 2007 Turkey had a population of 73 tn. Its labour force was 36 m, of which 12 m were trained
for the primary sector and 24 in were trained for the secondary and tertiary sectors. The
unemployment rate was 10%. What was the number of people unemployed?
A) 1.2m
B) 2.4 m
C) 3.6 m
D) 7.3 m

The correct answer choice is C

Number of unemployed people
Unemployment rate = × 100
labor force
Thus,
10
× 36 = 3.6 million
100

Q4) An economy's manufacturing share of real GDP fell from 30% in 1970 to 12% in 2016. What type
of unemployment would result from this?
A) cyclical Answer: C
B) frictional Decrease in share of GDP by manufacturing suggests a decline in
manufacturing sector leading to job losses. Hence the skills of some of
C) structural
manufacturing workers are no longer in demand. This is indicative of
D) voluntary structural unemployment. Types of unemployment given in other options do
not necessarily result from a fall in share of GDP of a particular sector.

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Q5) Why do some economists suggest there may be positive benefits from frictional unemployment?
A) A short supply of frictional unemployment may lead workers to become discouraged
B) Frictional unemployment allows time for retraining in newly emerging skills
C) Job search during frictional unemployment may lead to a better match of workers and jobs
D) The psychological effects of frictional unemployment are less than the economic effects

Answer: C
Options A, B, and D suggest negative effects of frictional unemployment.

Q6) Which type of unemployment occurs when aggregate demand is deficient?

A) Cyclical unemployment
B) Regional unemployment
C) Seasonal unemployment
D) Structural unemployment

Answer: A
Deficiency of aggregate demand suggests recession that is associated with business cycle

Q7) What would not be classified as structural unemployment?

A) A car worker who is replaced by a robot on the production line
B) A coal miner whose mine closes because of increased use of solar power
C) A fruit picker who cannot find work in the winter months
D) A textile worker whose factory closes and production moves abroad

Answer: C
It is seasonal unemployment. All other options suggest unemployment resulting from structural
changes in the economy, therefore, they are examples of structural unemployment.

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 +923443903583 Unemployment MCQs @adilusmanzoberi

Q8) Which policy is specifically designed to reduce the level of structural unemployment?
A) An increase in the level of state benefits paid to the unemployed
B) A reduction in interest rates
C) A reduction in the level of direct taxation
D) The provision of retraining schemes

Answer: D
Structural unemployment is the result of a mismatch between the skills required and the skills
possessed by the workers, therefore retraining will help. Option A is likely to increase it while B and C
would reduce demand deficient unemployment

Q9) A country has a population of 100 million. There are 5 million people unemployed and the country
has an unemployment rate of 10%
What is the size of the country’s labor force?
Number of people unemployment
Unemployment rate = × 100
Total labor force
5
10% = × 100
x
0.1x = 500
x = 5 million

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 +923443903583 National income Statistics - MCQs @adilusmanzoberi

Q1) The information in the table is taken forma country’s national income accounts.
$ million
National income 600
Consumer spending 400
Investment spending 80
Government spending on goods and services 100
Taxation 90
imports 120

What is the value of exports?

A) $100 million
B) $120 million
C) $140 million
D) $230 million

Answer: C
C + I + G + (X – M) = 600
C + I + G – m = 460
Hence X must have been $140 million. Taxation is not part of the calculation

Q2) The table shows some data for an economy

Government
Investment Exports Savings Imports Taxation National
expenditure
$m $m $m $m $m income $m
$m
200 100 50 50 12 100 700
200 100 50 60 140 150 800
200 100 50 75 160 200 900
200 100 50 100 180 275 1000

What is the equilibrium level of national income?

A) $700 m
B) $800 m Answer: B
C) $900 m Where the sum of leakages is equal to the sum of injections, national
D) $1000 m income (NY) is said to be in equilibrium, i.e., I + G + X = S + T + M

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Q3) The table shows data on a country’s gross national product at market prices and on domestic
spending
Year 1 Year 2 Year 3
($m) ($m) ($m)
GNP at market prices 420 440 560
Private consumption 200 260 300
Government consumption 120 120 140
Gross investment 90 80 130

In which of these years will the country be faced with a deficit on the current account of the balance
of payments?
Year 1 Year 2 Year 3
A) ❌ ✔ ✔
B) ❌ ✔ ❌

C) ✔ ❌ ✔
D) ✔ ❌ ❌

Answer: A
GNP = GDP + Net factor income
GDP market price = C +I + G (based on expenditure method)
Year 1 = 410 [200 + 120 + 90]
Year 2 = 460 [260 + 120 + 80]
Year 3 = 570 [300 + 140 + 130]

Net factor income:

Year 1 = 420-410 = 10
Year 2 = 440 – 460 = -20
Year 3 = 560 – 570 = -10
Net factor income is positive in year 1 hence there will not be a deficit on current account but in year 2
and year 3 its negative so current account will be in deficit

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Q4) The table shows some data for an economy

Government
Investment Exports Savings Imports Taxation National
expenditure
$m $m $m $m $m income $m
$m
200 100 50 125 62.5 62.5 600
200 100 50 150 75 75 700
200 100 50 175 87.5 87.5 800
200 100 50 200 100 100 900

What is the equilibrium level of national income?

A) $600 m
B) $700 m
C) $800 m
D) $900 m

Answer: C
In an open economy with government, national income equilibrium level is achieved when
S+T+M=I+G+X

Q5) The information in the table is taken forma country’s national income accounts.
$ million
National income 600
Consumer spending 400
Investment spending 80
Government spending on goods and services 100
Exports 140

What is the value of imports?

A) $100 million
B) $120 million
C) $140 million
D) $240 million

Answer: B
C + I + G + (X – M) = 600, C + I + G + X = 720, hence X must have been $120 million.
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Q6) The information in the table is taken from a country’s national income accounts.

US $
Income
millions
Wages 8000
Salaries 7000
Unemployment benefits 1000
Pensions 1000
Rent 3000
Interest 2000

What is the value of national income?

A) 17 000
B) 19 000
C) 20 000
D) 21 000

Answer: C
Unemployment and pensions are not included in national income calculation because they are
considered transfer payments, i.e., payments received without any corresponding output.

Q7) The table shows the figures for consumption, gross capital formation and depreciation in four
economies, all measured in US $.
Assuming that the state of technology remains unchanged, which economy is most likely to
experience economic growth?
Consumption Gross capital formation Depreciation
economy
($m) ($m) ($m)
A) 200 40 50
B) 500 200 150
C) 1000 1200 1400
D) 20 000 6000 6000

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Answer: B
Net capital formation = gross capital formation – depreciation
Positive net capital formation causes economic growth. Gross capital formation means investments
made in the economy on capital, equipment machinery building’s factories etc. Gross capital formation
includes both investments in new assets and the replacement or repair of existing ones. Hence, we
deduct the replacement investment/depreciation/capital consumption from it to arrive at net capital
formation.
Net capital formation: It takes into account the gross capital formation (total investments in physical
assets) and deducts the depreciation or wear and tear on existing assets. In other words, net capital
formation accounts for the amount of investment that contributes to expanding the productive capacity
of an economy. It reflects the net addition to the stock of capital goods and is an important indicator of
the sustainability of economic growth.
Positive net capital formation means outward shift in PPC and rise in productive capacity.

Q8) The table gives data for an economy.

2010 2011 2012 2013 2014
Gross Domestic Product (GDP)
200 220 240 300 320
at current prices ($ billion)
GDP deflator (price index) 100 109 125 149 154

In which year did real GDP decline compared with the previous year?

A) 2011 B) 2012 C) 2013 D) 2014

Answer: B
Nominal GDP
Real GDP = × 100
GDP Deflator

200
Real GDP in 2010 = × 100 = $200 billion
100

220
Real GDP in 2011 = × 100 = $202 billion
109

240 From the calculation, it can be observed

Real GDP in 2012 = × 100 = $192 billion
125 that the real GDP only declines in 2012

300
Real GDP in 2013 = × 100 = $201 billion
149

320
Real GDP in 2014 = × 100 = $208 billion
154

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