Answer to Question 4:

Suppose that the stock of capital employed in the domestic economy is 500 units and the stock of capital employed in the rest of the world is 5000 units. Assume that domestic residents hold 100 units of capital employed abroad and that foreigners own 50 units of capital employed in the domestic economy. The output flow is everywhere equal to 15 percent of the capital stock and the depreciation rate everywhere be 10 percent per year. Calculate GDP and GNP and National Income in both the domestic and the rest-of-world economies.

Gross Domestic Product of the domestic economy is 15 percent of 500, or 75. Subtracting depreciation of 10 percent of 500, or 50, yields a Net Domestic Product of the domestic economy of 25. Gross Domestic Product in the rest of the world is 15 percent of 5000, or 750, and depreciation is 10 percent of 5000, or 500, so that Net Domestic Product in the rest of the world is 250.

Foreigners own 50 of the 500 units of domestically employed capital, which gives them 10 percent of domestic Gross Domestic Product, or 7.5 units, leaving 67.5 units in possession of domestic residents. Domestic residents own 100 units of foreign employed capital which yields them 2 percent of foreign Gross Domestic Product, or 15 units, leaving rest-of-world residents with 735 units.

Domestic Gross National Product is thus equal to 67.5 plus 15, or 82.5 while foreign Gross National Product equals 735 plus 7.5, or 742.5.

To calculate net natioal income we can take advantage of the fact that the depreciation rate is 10 percent, which represent two-thirds of the gross income from the two capital stocks. Since the depreciation rate is the same in both economies, the net national incomes of the two countries' residents will be one-third of their gross national incomes. One-third of the domestic GNP of 82.5 is 27.5 and one-third of the foreign GNP of 742.5 is 247.5. The respective net national incomes are therefore 27.5 in the domestic economy and 247.5 in the foreign economy.

As a check, we need to make sure that world GDP equals world GNP. World Gross Domestic Product equals 750 plus 75, or 825. World Gross National Product equals domestic GNP, which equals 82.5, plus rest-of-world GNP, which equals 742.5. Adding these together, we obtain 825. And world National Income is 27.5 + 247.5 = 275, which is one-third of world GDP or one-third of 825 which equals 275.

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