S6 Economics Practice Paper: National Income, Price Index And Unemployment (100 Marks)

S6 Economics Practice Paper: National Income, Price Index and Unemployment (100 marks)

2026-11-12

S6 Economics – Macroeconomics and National Income

S6 Economics paper: 6 questions, 100 marks, 60 minutes. Expenditure GDP, real GDP and deflator, weighted CPI, unemployment rates, multiplier, GDP per capita. Full answers.

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Paper details　

Part 1: Expenditure Approach to GDP (18 marks)

An economy reports for 2026 (million dollars): private consumption expenditure 1,420,000, government consumption expenditure 380,000, gross domestic fixed capital formation 520,000, increase in inventories 18,000, exports of goods and services 3,150,000, imports of goods and services 3,050,000.

#	Question	Answer and marking notes
1	(a) Compute GDP using the expenditure approach.	Answer: 1,420,000 + 380,000 + 520,000 + 18,000 + 3,150,000 – 3,050,000 = 2,438,000 million dollars.
2	(b) Compute net exports of goods and services.	Answer: 3,150,000 – 3,050,000 = 100,000 million dollars, a net export position.
3	(c) Explain why an increase in inventories is counted as investment rather than consumption.	Answer: Inventories are goods produced but not yet sold in the period, so they are an addition to producers assets and enter the investment component rather than private consumption; a fall in inventories is recorded as a negative investment.
4	(d) If exports fall by 5 per cent with all other items unchanged, compute the new GDP and the percentage fall.	Answer: New exports 2,992,500 million, a fall of 157,500 million; new GDP 2,280,500 million, a fall of 6.46 per cent.
5	(e) State three types of transaction excluded from GDP and give one example of each.	Answer: First, resale of second-hand goods such as a used car, which only transfers an existing asset; second, pure financial transactions such as share trading, which create no new output; third, government transfer payments such as social security, which redistribute income rather than reward production.

Part 2: Nominal and Real GDP (16 marks)

An economy uses 2024 as the base year. The GDP deflator is 100 in 2024 and 108 in 2025; nominal GDP is 1,800,000 million dollars in 2024 and 1,944,000 million dollars in 2025.

#	Question	Answer and marking notes
6	(a) Compute real GDP for 2025.	Answer: 1,944,000 x 100 / 108 = 1,800,000 million dollars.
7	(b) Compute the growth rate of nominal GDP in 2025.	Answer: (1,944,000 – 1,800,000) / 1,800,000 x 100 per cent = 8.0 per cent.
8	(c) Compute the growth rate of real GDP in 2025 and explain the difference from the nominal rate.	Answer: (1,800,000 – 1,800,000) / 1,800,000 x 100 per cent = 0.0 per cent; the whole nominal rise of 8.0 per cent comes from a 8.0 per cent price increase, with no gain in output.
9	(d) Compare the GDP deflator with the CPI on three points of coverage and weighting.	Answer: First, coverage: the deflator covers all domestically produced goods and services while the CPI covers only the household consumption basket; second, imports: the deflator excludes imported goods whereas the CPI includes imported consumer goods; third, weights: deflator weights follow the current output mix each year while CPI weights are fixed until the next rebasing.

Part 3: Consumer Price Index and Inflation (17 marks)

Household expenditure weights are 35 per cent on food, 32 per cent on housing, 15 per cent on transport and 18 per cent on other items. This year group indices (last year equals 100) are food 140, housing 125, transport 118 and others 112; last year overall CPI was 118.5.

#	Question	Answer and marking notes
10	(a) Compute this year overall CPI using the weighted average method.	Answer: 0.35 x 140 + 0.32 x 125 + 0.15 x 118 + 0.18 x 112 = 126.86.
11	(b) If food prices rise by a further 10 per cent with other groups unchanged, compute the new overall index.	Answer: The food index rises from 140 to 154, so the new index is 0.35 x 154 + 0.32 x 125 + 0.15 x 118 + 0.18 x 112 = 131.76.
12	(c) Compute the effect of the food group alone on the overall index, in index points and in per cent.	Answer: Food carries a weight of 0.35 and rises 14 points, adding 4.9 index points, which is 3.86 per cent of the overall index.
13	(d) Compute the inflation rate from last year to this year and state two limitations of the CPI as a cost of living measure.	Answer: Inflation is ({0} – {1}) / {1} x 100 per cent = {2} per cent. Limitations: the basket reflects an average household, so families with different spending patterns face different rates; and the index measures prices only, ignoring quality change and the substitution of cheaper alternatives by households.

Part 4: Unemployment and Labour Force (16 marks)

Data for an economy in 2026: non-institutional population aged 15 and over 6,320,000; employed persons 3,860,000; unemployed persons 148,000; underemployed persons 62,000.

#	Question	Answer and marking notes
14	(a) Compute the unemployment rate.	Answer: Labour force = 3,860,000 + 148,000 = 4,008,000; unemployment rate = 148,000 / 4,008,000 x 100 per cent = 3.69 per cent.
15	(b) Compute the labour force participation rate.	Answer: 4,008,000 / 6,320,000 x 100 per cent = 63.42 per cent.
16	(c) Compute the underemployment rate.	Answer: 62,000 / 4,008,000 x 100 per cent = 1.55 per cent.
17	(d) Explain why a fall in the unemployment rate does not necessarily mean the labour market has improved.	Answer: The labour force is the denominator, so if discouraged workers stop searching and leave the labour force, both the unemployed count and the labour force fall and the ratio drops without any new jobs; the underemployment rate, vacancies and real wages must be read together before judging any improvement.

Part 5: Multiplier Effect and Equilibrium Income (17 marks)

A closed economy without government has a marginal propensity to consume of 0.75 and autonomous expenditure of 480,000 million dollars.

#	Question	Answer and marking notes
18	(a) Compute the expenditure multiplier.	Answer: 1 / (1 – 0.75) = 4.0.
19	(b) Compute the equilibrium income.	Answer: 480,000 x 4.0 = 1,920,000 million dollars.
20	(c) If autonomous expenditure rises by 20,000 million dollars, compute the new equilibrium income and the increase.	Answer: The increase is 20,000 x 4.0 = 80,000 million; new equilibrium income is 1,920,000 + 80,000 = 2,000,000 million dollars.
21	(d) If the marginal propensity to consume rises to 0.8, compute the new multiplier and equilibrium income.	Answer: Multiplier = 1 / (1 – 0.8) = 5.0; equilibrium income = 480,000 x 5.0 = 2,400,000 million dollars.
22	(e) State two conditions for the multiplier effect to operate.	Answer: First, the economy needs spare productive capacity so firms can raise output without immediate price rises; second, the marginal propensity to consume must be positive and stable so each round of new income generates further spending; heavy import leakage or exhausted capacity greatly weakens the effect.

Part 6: Output per Head and Living Standards (16 marks)

An economy has real GDP of 2,438,000 million dollars and a population of 7.5 million in 2026. Next year real GDP is expected to grow by 3.0 per cent while population grows by 1.2 per cent.

#	Question	Answer and marking notes
23	(a) Compute real GDP per head in 2026.	Answer: 2,438,000 million / 7.5 million people = 325,067 dollars.
24	(b) Compute next year growth rate of real output per head.	Answer: (1 + 3.0 per cent) / (1 + 1.2 per cent) – 1 = 1.78 per cent, so real output per head grows about 1.78 per cent.
25	(c) Explain why real output per head rises only when real output grows faster than population.	Answer: Output per head divides real output by population, so a larger population spreads the same output among more people; only when output grows faster than population does each person get more, and here 3.0 per cent exceeds 1.2 per cent, leaving a 1.78 per cent gain.
26	(d) State three limitations of using real output per head as a measure of living standards.	Answer: First, it ignores income distribution, so a higher average does not mean poorer households are better off; second, it ignores non-market activity such as unpaid care and volunteering; third, it ignores environmental costs and leisure, so pollution and longer working hours are invisible in the average.

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