James Willingham, CFA, is an equity portfolio manager and partner in a large investment firm in New York. The firm hires a group of new college graduates each year for its internship program, in which the interns rotate through each of the investment departments of the firm for a six week period to gain insight into the different areas of the firms operations. The interns attended top universities around the country and have studied the basic theories of finance, but for the most part have no practical experience working with investments. Willingham, as head of the domestic equity desk, is responsible for the supervision of the interns while they are in his department. Over the past several years, Willingham has noticed that although the interns are selected from a highly qualified pool of candidates, they seem to not have a firm working knowledge of some of the basic economic principles necessary to successfully manage an investment portfolio. Willingham has written a sample case study for the interns to analyze to strengthen their skills when assessing equities for investment. He feels that it will provide knowledge that will be useful as they rotate through each of the departments of the firm. The case study begins with a review of the most common measures of economic activity: gross domestic product (GDP), gross national income (GNI) and net national income (NNI). Willingham believes it is very important to understand the differences in the composition of the three measures in order to meaningfully compare and contrast the reported results among different countries. He formulates sample data for a country in order for each of the interns to practice calculating the different measures of a countrys productivity. Sample Data (year ending 12/31/05) NNI $45,000,000 Net property income from abroad $7,250,000 Deprecation $3,875,000 Indirect taxes $2,465,000 Subsidies $2,935,000 Willingham also expects the interns to have a full working knowledge of the three components of GDP: output, expenditure, and income. He believes that knowing the interrelationship of these three measures, how they are derived, and how they should be interpreted is crucial for assessment of a countrys economy as well as the effect it can have on an individual stock. Among the three most widely used measures of economic activity: A) GNI is theoretically the most accurate, although not widely used because of the difficulty in quantifying the economic cost of depreciation. B) there is typically very little difference between the GDP and NNI of a country. C) GDP only counts production from within a countrys geographic boundaries, while GNI includes productivity of a countrys citizens regardless of where assets are located. D) GDP understates economic activity to the greatest degree because the production of the underground economy is not included in the measure. -------------------------------------------------------------------------------- Calculate the GDP based upon the information given above: A) $48,375,000. B) $45,470,000. C) $41,625,000. D) $37,750,000. -------------------------------------------------------------------------------- Utilizing the information given above, which of the following measures of productivity should produce the highest number, all other things being equal? A) GDP at market prices. B) NNI. C) GDP at factor cost. D) GNI. -------------------------------------------------------------------------------- Assume that a United States-owned company operates a production facility in India, and produces $25,000,000 of goods per year at that location. Which of the following statements regarding the production of the facility is most accurate? A) The production of the facility in India would not be included in the GDP measure for the United States. B) The production of the facility in India would not be included in the GNI measure for the United States. C) The production of the facility in India would not be included in the NNI measure for the United States. D) The production of the facility in India would not be included in the GDP measure for India. -------------------------------------------------------------------------------- In order to convert GDP at factor cost to GDP at market prices, which of the following adjustments should be made to GDP at factor cost? Indirect Taxes Subsidies A) Add Subtract B) Subtract Subtract C) Subtract Add D) Add Add -------------------------------------------------------------------------------- Which of the following statements regarding the measurement of the productivity of a country is most accurate? A) Income is presented as an index, with a base years income set equal to 100, and subsequent years expressed as a percentage of the base year. B) The most comprehensive measure of a countrys expenditure component is derived by adding all consumption, investment, and export of goods and services. C) The income measure excludes passive income such as trading profits and rental income. D) Output is considered to be the most reliable of the three measures, while expenditure is considered to be the least reliable.
hi dinesh, post me the question no please cannot read it online. working on econ today… will post answers later. Thanks
- C 2) C 3) D 4) A 5) C
Dinesh aren’t you afraid of getting banned?
just a nitty little area i think i’d somewhat chosen to overlook… there goes that plan.
C D A A B
Part 1) C Part 2) C Part 3) D Part 4) A Part 5) B last one i am not between B and D. For D I beleive income is the most difficult to measure because not everyone declares what he earns. so will go with B.
C C D A A B Accidentally skipped one of the questions.
even me and i gave the wrong answers to the parts… the beauty of reading online. Part 1 ) C Part 2) C Part 3) D Part 4) A Part 5) A Part 6) B With PArt 6 i am not very sure between B and D because of reason given above.
C C D A A D I have no cue about #5. Guess i need to take a look at that again.
C? C? C? A? C? B?
how did you get to c on second question? Cheers
- C 2) C 3) D 4) A 5) A 6) B
NNI, add back in depreciation to get GNI. Then subtract out income from citizens abroad since that is not included in domestic production.
C C D A A B
C C D A A B These questions require a lot of concentration. Last time messed up from factor to market and market to factor :-(.
Correct Answers are C, C, D, A, A, B
you know what though… this had thrown me off when i was doing the question myself… Part 6. B) The most comprehensive measure of a countrys expenditure component is derived by adding all consumption, investment, and export of goods and services. although it seems like this is “most accurate” …it’s really not because the expenditure component is derived by adding all consumption, investment, exports of good and services AND SUBTRACTING imports of goods and services… I almost DIDN’T select this answer …but then none of the others seemed right either…