Please Answer 24-28 Questions 24-28: Pakistan\'s GDP is S230 billion per year, a
ID: 1162565 • Letter: P
Question
Please Answer 24-28
Questions 24-28: Pakistan's GDP is S230 billion per year, and Pakistan's interest rate is constant at 10%. In year 1 Pakistan is hit by a strong earthquake which causes its GDP to drop this year to only 8120 billion. I will rever back to S230 billion in all subsequent years. Assume Pakistan consumers aim to perfectly smooth consumption across all future years, and are able to borrow at an interest rate of 10% from foreigners. Year PV GDP 120 230 230 230 ?? NFIA FA 21. What will the path of Pakistan's Consumption(C) in the year of the earthquake and sub equent years Complete the correspndig row of the table (a) 0, 220, 220, 220, . (b) 220, 220, 220, 220, c 120, 230, 230, 230, .. (d) 0, 230, 230, 230, 25. What will the path of Pakistan's Trade Balance(TB) in the year of the earthquake and subsequent years. Complete the corresponding row of the table. (a) 120, 10, 10, 10, . (b -100, 10,10, 10,.. (e) 100, 10, 10,-10, 26. What will the path of Pakistan's Net Factor Inome from Abroad(NFIA) in the year of yers. Complete the orrisponding row of the e the earthqsb (a) 0, 220, 220, 221), .. 20,. 10, 10 . (e 10, 10, -10, 0 0, 0, 0., 27. whal will the pilli "?PakisLiins Financial Account FA) in Ihe year'í ille eir1hqllike fa100,0 0. 0, 20,, 0, 10. . 0, 0,-10, -10.. id 0, 0,O, 28 Tn the yhe rarthuakefyear 2) Pakistndisoversssishaes deosits ofishore. Acceasing the shale gas will require an investment of S15 billion. If exploited, on current projections of gas prices, the gas deposits could yield an income of $2 billion a year indefintely, heginning in the year following the invest Woukd it be profitable for Pakisti frm s to invest in developin the gas fieldsi? (a) NPVS10 billnd Pakist shoudertake this project (b) NPV5 billion and Pakistn shoudertake this project NPV 85 billon and Pakistan should undertake this project id) NPV S10 billion and Pakistan should undertake this project.Explanation / Answer
25.
Trade Balance (TB)= Net trade inwards
=Monetary Value of exports
- Monetary value of imports
Since Pakistan was hit by a strong earthquake and the GDP has dropped in that year but it recovered to its fullest in the subsequent year,
Trade Balance in the year 1 should be less than Trade Balance in the following years , preferably negative as well.
Hence Option (b) -100,10,10,10, ... is a fitting answer.
24.
Pakistan's consumption (C)
=GDP-TB
because GDP using CPI method is equal to the sum of total domestic consumption C and the Trade Balance TB
Therefore from the given values of GDP, the result of 25. and the point that consumers' aim to perfectly smoothen consumption ,
Option (b) 220,220,220,220, ... is a fitting answer.
27.
Due to the earthquake,
The Financial Account (FA) which is the difference of monetary value of domestic ownership of foreign assets and foreign ownership of domestic assets is more in year 1 than the years that follow.
Because of a blow to the value of domestic assets and immediate recovery.
Hence Option (a) 100,0,0,0,0, ... is a fitting answer.
26.
Balance of payments (BOP)
=Net value of (Capital account+Current account+Financial account)
The capital account measures financial transactions that don't affect income, production, or savings of individuals . Hence it can be taken as zero for all the years.
For BOP to be zero,
Current account= -(Financial Account)
But Current account (CA) = TB+NFIA
Therefore NFIA = -(TB+FA)
Hence From the above relation and the results of 25. and 27.,
Option (c) 0,-10,-10,-10, ... is a fitting answer.
28.
Cost of accessing the shale gas deposits
=$15 bn
Income yielded in the subsequent years indefinitely is $2 bn
Interest rate of the Pakistan is constant at 10% per anum
The present value of future income by undertaking this project
=(2/(1.1))+(2/(1.1)^2)+(2/(1.1)^3)+ ... infinity
=2*((1/(1.1))/(1-(1/(1.1)))=$20 bn {Geometric progression}
Net Present Value (NPV)
= Present Value of return of investment
-Present value investment
=$20 bn-$15 bn=$5 bn
Since NPV is positive, Pakistan should undertake this project.
Hence Option (c) is the right answer.
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