Question

Consider a case in which a given economy reports a GNP level of 5.4bn USD. The primary income net flows are work 1.2bn, while secondary income transfers are worth 0.2bn.

1) What is the implied level of GDP under these circumstances? Note that primary income is associated with income flows for compensating employees whereas secondary income is associated with transfers of income.

Answer 1

The implied level of GDP, when given a GNP of 5.4 billion USD, primary income net flows of 1.2 billion USD, and secondary income net flows of 0.2 billion USD, is calculated to be 4.4 billion USD.

Step-by-step explanation:

To calculate the Gross Domestic Product (GDP) from the given Gross National Product (GNP), we need to take into account the primary and secondary income net flows. Given that GNP is 5.4 billion USD, primary income net flows, which consist primarily of payments for labor in the form of wages and salaries, amount to 1.2 billion USD, and secondary income net flows, which include transfers such as remittances or social security payments, are 0.2 billion USD.

The formula to derive GDP from GNP is: GDP = GNP - Net primary income from abroad + Net secondary income from abroad. In this case, the net primary income flow is positive, indicating more primary income was received from the rest of the world than was paid, and similarly, a positive secondary income flow shows more transfers received than sent. Therefore, GDP can be calculated as:

GDP = 5.4bn - 1.2bn + 0.2bn

GDP = 4.4 billion USD. Hence, the implied level of GDP under these circumstances is 4.4 billion USD.