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HKDSE Economics Practice Paper: GDP, Price Indices and Living Standards
HKDSE Economics: GDP and Living Standards
HKDSE Economics practice paper: 12 questions, 100 marks, 75 minutes on GDP, the CPI, unemployment, the multiplier and real interest rates, with full worked answers.
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Paper details Level: S4-S6 | Subject: Economics | Time: 75 minutes | Marks: 100 | Questions: 12
Section A (Questions 1 to 4, 32 marks)
Read each question, quote the formula, substitute the values and give the unit.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | The expenditure data of an economy in a given year are (in billions of dollars): private consumption 1,200, government consumption 300, gross domestic fixed capital formation 500, increase in inventories 20, exports of goods and services 900, imports of goods and services 850. (a) Calculate GDP by the expenditure approach. (b) Find net exports. (c) If imports rise to 900 and all other items stay the same, find the new GDP. (d) Explain why an increase in inventories is counted as investment. | (a) Investment = gross domestic fixed capital formation + increase in inventories = 500 + 20 = 520; GDP = 1,200 + 300 + 520 + 900 – 850 = 2,070 billion [2]. (b) Net exports = 900 – 850 = 50 billion [2]. (c) GDP = 1,200 + 300 + 520 + 900 – 900 = 2,020 billion, which is 50 less [2]. (d) Inventories are goods produced this year but not yet sold, so they are part of this year output; firms treat the unsold stock as an asset they have bought, so it counts as investment, otherwise current output would be understated [2]. Marking: use GDP = C + I + G + X – M and deduct imports; inventory change may be negative. |
| 2 | Nominal GDP was 2,600 billion in 2023 and 2,800 billion in 2024; the GDP deflator was 100 in 2023 and 110 in 2024. (a) Using 2023 as the base year, find real GDP in 2024. (b) Find the economic growth rate in 2024. (c) Find the inflation rate in 2024. (d) Explain how nominal GDP can rise while real GDP falls. | (a) Real GDP = 2,800 / 110 x 100 = 2,545.5 billion [3]. (b) Growth rate = (2,545.5 – 2,600) / 2,600 = -2.1 per cent [2]. (c) Inflation rate = (110 – 100) / 100 = 10 per cent [1]. (d) Nominal output reflects both quantities and prices; if prices rise faster than output falls, the nominal value still rises, but at base period prices real output has fallen, showing lower actual production [2]. Marking: growth comparisons must use real figures; the rise in the deflator is the inflation rate. |
| 3 | The expenditure weights of a CPI are food 40 per cent, housing 35 per cent, transport 15 per cent and others 10 per cent. With the base year index at 100, next year the component indices are food 110, housing 105, transport 90 and others 100. (a) Calculate the CPI for next year. (b) Find the inflation rate. (c) If food prices rise by a further ten per cent and all else is unchanged, find the new index. (d) Give two reasons why the CPI may overstate the rise in the cost of living. | (a) Index = 0.40 x 110 + 0.35 x 105 + 0.15 x 90 + 0.10 x 100 = 44 + 36.75 + 13.5 + 10 = 104.25 [2]. (b) Inflation = 104.25 – 100 = 4.25 per cent [1]. (c) Food index becomes 121, so that item contributes 48.4; new index = 48.4 + 36.75 + 13.5 + 10 = 108.65 [2]. (d) Consumers substitute cheaper goods for those that rise in price while the index assumes a fixed basket, and quality improvements are hard to capture, so the index tends to overstate the rise in the cost of living [3]. Marking: weight each component before adding; never take a simple average. |
| 4 | In an economy the population aged 15 and over is 6,000,000, the labour force is 3,900,000 and employment is 3,705,000. (a) Find the number of unemployed people. (b) Find the unemployment rate. (c) Find the labour force participation rate. (d) If 50,000 unemployed people give up looking for work, find the new unemployment rate and explain why this figure may understate slack in the labour market. | (a) Unemployed = 3,900,000 – 3,705,000 = 195,000 [2]. (b) Unemployment rate = 195,000 / 3,900,000 = 5.0 per cent [2]. (c) Participation rate = 3,900,000 / 6,000,000 = 65.0 per cent [1]. (d) The labour force falls to 3,850,000 and the unemployed to 145,000, so the rate is 145,000 / 3,850,000 = 3.8 per cent; these people still want work but have stopped searching, so they are hidden unemployed outside the labour force and the rate understates slack [3]. Marking: the denominator is the labour force, not the population; discouraged workers shrink it. |
Section B (Questions 5 to 8, 36 marks)
Answer the following, showing full working and the formula used.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | The government raises autonomous spending by 200 billion. The marginal propensity to consume is 0.8. (a) Find the expenditure multiplier. (b) Find the maximum rise in equilibrium income. (c) If the marginal propensity to consume were 0.75, find the new multiplier and the rise in income. (d) Explain why the actual multiplier is usually smaller than the theoretical one. | (a) Multiplier = 1 / (1 – 0.8) = 5 [2]. (b) Rise in income = 200 x 5 = 1,000 billion [2]. (c) Multiplier = 1 / (1 – 0.75) = 4, so the rise is 200 x 4 = 800 billion [2]. (d) Higher spending pushes up interest rates and crowds out private investment; part of the spending leaks into imports and saving; and taxes rise with income, reducing disposable income, so the actual multiplier is smaller [3]. Marking: the marginal propensity to consume must refer to locally produced goods and services. |
| 6 | A closed economy has (in billions): consumption 300, investment 120, government spending 100, exports 140, imports 110, taxes 90 and saving 160. (a) Find total injections. (b) Find total leakages. (c) State whether the economy is in equilibrium and explain. (d) If government spending rises to 130 while other items are initially unchanged, explain how the economy adjusts to a new equilibrium. | (a) Injections = investment + government spending + exports = 120 + 100 + 140 = 360 billion [2]. (b) Leakages = saving + taxes + imports = 160 + 90 + 110 = 360 billion [2]. (c) Injections equal leakages at 360, so the economy is in equilibrium and income has no tendency to change [2]. (d) With government spending at 130, injections become 390 and exceed leakages, so stocks fall and production and income rise; the higher income raises saving, taxes and imports until leakages return to 390 [3]. Marking: equilibrium requires injections equal leakages; adjustment works through income and leakages. |
| 7 | A worker daily wage rises from 180 to 198 dollars while the CPI rises from 100 to 108. (a) Find the percentage rise in the nominal wage. (b) At base period prices, find the real wage next year. (c) Find the percentage rise in the real wage. (d) Explain why a ten per cent nominal pay rise raises purchasing power by only about two per cent. | (a) Nominal rise = (198 – 180) / 180 = 10 per cent [2]. (b) Real wage = 198 / 1.08 = 183.3 dollars [2]. (c) Real rise = (183.3 – 180) / 180 = 1.9 per cent [2]. (d) An 8 per cent rise in prices absorbs most of the pay rise, leaving only about 1.9 per cent as a real gain in purchasing power; if inflation exceeds the pay rise the real wage falls [3]. Marking: real wage = nominal wage divided by the price index; compare the pay rise with inflation. |
| 8 | Country A has a GDP of 3,000 billion and a population of 5 million; country B has a GDP of 2,000 billion and a population of 2.5 million. (a) Find the GDP per capita of each country. (b) State which country has the higher output per person. (c) Give three reasons why GDP per capita is not a full measure of living standards. (d) Explain the purpose of adjusting GDP per capita for purchasing power parity. | (a) Country A: 3,000 / 5 million = 60,000 dollars; country B: 2,000 / 2.5 million = 80,000 dollars [3]. (b) Country B has the higher output per person, by 20,000 dollars [1]. (c) GDP per capita ignores the distribution of income; it excludes non-market activity such as housework and volunteering; and it ignores leisure, environmental quality and public services, and is not adjusted for price differences [3]. (d) Purchasing power parity converts values using relative price levels, removing exchange rate and price differences so that real living standards can be compared across places [2]. Marking: a per capita figure is an average and says nothing about each individual. |
Section C (Questions 9 to 12, 32 marks)
Show fuller working and explanation, with units in every answer.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | The annual interest rate on deposits is 6 per cent and the inflation rate is 4 per cent. (a) Find the approximate real interest rate. (b) If inflation rises to 7 per cent while the nominal rate is unchanged, find the real interest rate. (c) In that situation, do borrowers and savers gain or lose? (d) Explain why high inflation encourages borrowing and discourages saving. | (a) Real rate is about 6 – 4 = 2 per cent [2]. (b) Real rate = (1.06 / 1.07) – 1 = -0.9 per cent [2]. (c) Borrowers gain because the real burden of repayment falls; savers and people on fixed incomes lose because the real return is negative [2]. (d) Unanticipated inflation erodes the real value of debt, so repayment becomes easier and borrowing more attractive; the real return on deposits falls or turns negative, so the incentive to save weakens [2]. Marking: whether anyone gains depends on whether inflation was anticipated; the real rate can be negative. |
| 10 | The annual inflation rate is 12 per cent. (a) Use the rule of 70 to estimate the number of years for prices to double. (b) Use the compound interest formula to calculate that number of years precisely. (c) Explain menu costs and shoe-leather costs. (d) Explain how persistent high inflation weakens the store of value function of money. | (a) Rule of 70: 70 / 12 = 5.8 years [2]. (b) 1.12^n = 2, so n = log 2 / log 1.12 = 6.1 years [2]. (c) Menu costs are the costs to firms of reprinting price lists and updating systems when prices change; shoe-leather costs are the time and money spent making more frequent trips to the bank because holding cash is costly [2]. (d) Money steadily loses purchasing power, so holding cash destroys value and people switch to real assets, foreign currency or interest-bearing assets to store wealth, weakening money as a store of value [2]. Marking: the rule of 70 is only an approximation and is less accurate at high inflation. |
| 11 | Exports are 1,450 billion, imports are 1,380 billion and GDP is 5,000 billion. (a) Find net exports. (b) Find the trade balance as a percentage of GDP. (c) If imports rise by five per cent while exports are unchanged, find the new net exports and the new GDP. (d) Explain why a trade surplus does not necessarily mean a healthy economy. | (a) Net exports = 1,450 – 1,380 = 70 billion [2]. (b) Share of GDP = 70 / 5,000 = 1.4 per cent [2]. (c) Imports become 1,449, so net exports are 1 billion and GDP = 5,000 – 69 = 4,931 billion [2]. (d) A surplus may come from compressed imports or weak domestic demand rather than strong exports; if it is achieved by holding down local consumption and investment, living standards suffer, so the source and structure of the surplus matter [2]. Marking: net exports can be negative; the trade balance must be read with the structure of the economy. |
| 12 | Real GDP rises from 4,000 billion to 4,240 billion while the labour force rises from 2.00 million to 2.02 million. (a) Find the economic growth rate. (b) Find output per worker in each year and its percentage rise. (c) Hence estimate the contributions of labour input and of productivity to growth. (d) Explain how human capital and technological progress raise productivity. | (a) Growth = (4,240 – 4,000) / 4,000 = 6 per cent [2]. (b) Output per worker is 4,000 / 2.00 million = 200,000 dollars in the first year and 4,240 / 2.02 million = 209,901 dollars in the second, a rise of 4.95 per cent [3]. (c) The labour force grew by 1 per cent while output grew by 6 per cent, so labour input contributed about 1 percentage point and productivity about 4.95 percentage points, making productivity the main source of growth [2]. (d) Education and training raise human capital so each worker can produce more and use new technology; technological progress improves processes and the quality of capital, raising output per hour [1]. Marking: output per person only rises when output grows faster than the labour force. |
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