Tutorial 1 Answers

Q1
(i)(a) Consumption increases because a washing machine is a good purchased by a household, but
Investment decreases because the washing machine in Fisher and Paykels inventory had been
counted as an investment good until it was sold.
(i)(b) Consumption increases because the bottle is a good purchased by a household, but net
exports decrease because the bottle was imported.

(ii) The production of a luxury car contributes more to GDP than the production of an economy car
because the luxury car has a higher market value. Note that the question asks you to compare one
car of two types and not the total sale of one type of car with the other.

Q2
INCORRECT. Investment increases because new structures and equipment were built. When Nestle
Australia builds a factory in Christchurch, it represents foreign direct investment. All of that
investment could be done with NZ made materials. So imports would not increase necessarily.
However, the rise in investment increases N.Z. GDP since it increases production in New Zealand.
Q3
CORRECT. The output produced in a Fonterra plant in China increases GDP of China but not GDP of New
Zealand, since GDP includes output from plants located in the country only. When the New Zealander
remits part of his income to his family in New Zealand, it increases the net factor income from abroad
(NFIA). Consequently, the Gross National Disposable Income (GNDI) increase, since GNDI = GDP + NFIA +
net current transfer.

Q4
CORRECT. When a refugee from Zimbabwe migrates to New Zealand and brings all his liquid assets
permanently to New Zealand, New Zealand's GDP does not changes, since those assets were not
produced in New Zealand. However, it increases the net current transfer (NCT) to New Zealand.
Consequently, the Gross National Disposable Income (GNDI) increase, since GNDI = GDP + NFIA + NCT.

Q5
INCORRECT. Nominal GDP (PY) of a country can grow even if its output (Y) or real GDP does not grow, if
there is inflation or a growth in the price level . The standard of living of the people living in a country
depends on the quantity of goods and services they can buy and not on their total expenditure in
nominal (or money) units.

Q6
CORRECT. Expenditure on clean up would add to G and I depending upon how the US Govt and the BP
share the expenditure and those expenditure would corresponds to new goods and services (related to
clean-up effort) sold in the market. However, the best possible outcome of that clean-up effort would
be to restore the natural environment as before and no better but even that outcome is quite unlikely.