ECO3203 Ex 1

Find the GDP deflator for the current year and the base year. By what percentage does the price level change from the base year to the current year?

(Nominal GDP/Real GDP) * 100 Current year GDP deflator = (200,000 / 178,000) * 100 = 112.4 Base year GDP deflator is 100 by definition. Thus, price level measured by GDP deflator increased by 12.4 percent.

For the consumer price index values shown, calculate the rate of inflation in each year from 1930 to 1933. What is unusual about this period, relative to recent experience? Year 1929 1930 1931 1932 1933 CPI 51.3 50.0 45.6 40.9 38.8

1929 - 30: [(50.0 - 51.3)/50.0] x 100 = -2.5% 1930 - 31: [(45.6 - 50.0)/50.0] x 100= -8.8% 1931 - 32: [(40.9 - 45.6)/45.6] x 100 = -10.3% 1932 - 33: [(38.8-40.9)/40.9] x 100 = -5.1%

Hy Marks buys a one-year government bond on January 1, 2012, for $500. He receives principal plus interest totaling $545 on January 1, 2013. Suppose that the CPI is 200 on January 1, 2012, and 214 on January 1, 2013. This increase in prices is more than Hy had anticipated; his guess was that the CPI would be 210 at the beginning of 2013. Find the nominal interest rate, the inflation rate, the real interest rate, Hy's expected inflation rate, and Hy's expected real interest rate. Real interest rate

= Nominal interest rate - inflation rate = 2%

Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: Government saving

= T - G - TR - Interest Payment = 60 - 30 - 25 - 15 = -10

Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: Private saving

= Y + TR + NFP + Interest Payment - C - T = 202 + 25 + (-2) + 15 - 150 - 60 = 30

Hy Marks buys a one-year government bond on January 1, 2012, for $500. He receives principal plus interest totaling $545 on January 1, 2013. Suppose that the CPI is 200 on January 1, 2012, and 214 on January 1, 2013. This increase in prices is more than Hy had anticipated; his guess was that the CPI would be 210 at the beginning of 2013. Find the nominal interest rate, the inflation rate, the real interest rate, Hy's expected inflation rate, and Hy's expected real interest rate. Expected inflation rate

= [(210 - 200)/200]* 100 = 5% Expected inflation rate = Nominal interest rate - Expected inflation rate = 4%

Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: Consumption

C = Y - (I + G + NX) Current Account (CA) = NX + Net Factor Payment (NFP) Give Current Account = -20, Net Factor Payment = 7 - 9 = 2; NX = -18 Y = GNP - NFP Or, Y = 200 - (-2) = 202 Therefore, C = 202 - (40 + 30 - 18) = 150

Find real GDP in the current year and in the base year. By what percentage does real GDP increase from the base year to the current year?

Current year (Q current * P base) = 4000 x 2 + 14000 x 3 + 32000 x 4 = 178,000 Base year SUM (QxP) = 56,000 Percentage increase in real GDP = 218%

Find nominal GDP in the current year and in the base year. What is the percentage increase since the base year?

Current year QxP = 4000 x 3 + 14000 x 2 + 32000 x 5 = 200,000 Base year Q x P = 3000 x 2 + 6000 x 3 + 8000 x 4 = 56,000 Percentage increase of 257 % from base year to current year

National income and product data are generally revised. What effects would the following revisions have on consumption, investment, government purchases, net exports, and GDP? Give adequate explanation. It is discovered that businesses bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in North Carolina.

Furniture made in North Carolina that is bought by businesses counts as investment, so consumption is unchanged, investment increases by $6 billion, government purchases are unchanged, net exports are unchanged, and GDP increases by $6 billion.

National income and product data are generally revised. What effects would the following revisions have on consumption, investment, government purchases, net exports, and GDP? Give adequate explanation. It is discovered that consumers bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in North Carolina.

Furniture made in North Carolina that is bought by consumers counts as consumption, so consumption increases by $6 billion, investment is unchanged, government purchases are unchanged, net exports are unchanged, and GDP increases by $6 billion.

National income and product data are generally revised. What effects would the following revisions have on consumption, investment, government purchases, net exports, and GDP? Give adequate explanation. It is discovered that businesses bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in Sweden.

Furniture made in Sweden that is bought by businesses counts as investment and imports, so consumption is unchanged, investment increases by $6 billion, government purchases are unchanged, net exports decline by $6 billion, and GDP is unchanged.

National income and product data are generally revised. What effects would the following revisions have on consumption, investment, government purchases, net exports, and GDP? Give adequate explanation. It is discovered that consumers bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in Sweden.

Furniture made in Sweden that is bought by consumers count as consumption and imports, so consumption increases by $6 billion, investment is unchanged, government purchases are unchanged, net exports fall by $6 billion, and GDP is unchanged.

After a boat rescues everyone else from Gilligan's Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows coconuts and catches fish. Last year he harvested 1,000 coconuts and caught 500 fish. He values one fish as worth two coconuts. The Professor gave 200 coconuts to Gilligan in exchange for help in the harvest, and he gave Gilligan 100 fish in exchange for collecting worms for use in fishing. The Professor stored 100 of his coconuts in his hut for consumption at some future time. Gilligan consumed all his coconuts and fish. In terms of fish, what is the GDP of Gilligan's Island?

GDP is the value of all final goods and services produced during the year. The final output of coconuts is 1000, which is worth 500 fish, because two coconuts are worth one fish. The final output of fish is 500 fish. So in terms of fish, GDP consists of 500 fish worth of coconuts plus 500 fish, with a total value of 1000 fish.

Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: Net exports

Given Current Account -20

After a boat rescues everyone else from Gilligan's Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows coconuts and catches fish. Last year he harvested 1,000 coconuts and caught 500 fish. He values one fish as worth two coconuts. The Professor gave 200 coconuts to Gilligan in exchange for help in the harvest, and he gave Gilligan 100 fish in exchange for collecting worms for use in fishing. The Professor stored 100 of his coconuts in his hut for consumption at some future time. Gilligan consumed all his coconuts and fish. What are the incomes of the Professor and Gilligan?

In terms of income, Gilligan's income is clearly worth 200 fish (100 fish plus 200 coconuts worth 100 fish). The Professor's income is 800 coconuts (1000 coconuts minus the 200 coconuts paid to Gilligan) plus 400 fish (500 fish minus 100 fish paid to Gilligan). In terms of fish, the Professor's income has a value of 800 fish.

Hy Marks buys a one-year government bond on January 1, 2012, for $500. He receives principal plus interest totaling $545 on January 1, 2013. Suppose that the CPI is 200 on January 1, 2012, and 214 on January 1, 2013. This increase in prices is more than Hy had anticipated; his guess was that the CPI would be 210 at the beginning of 2013. Find the nominal interest rate, the inflation rate, the real interest rate, Hy's expected inflation rate, and Hy's expected real interest rate. Inflation rate

Inflation rate = 7%

Given C = 200 + .75 (Y - T) - 500 r G = 20, T = 10, NX = 5 I = 100 - 200 r What is the size of the multiplier for this economy?

Multiplier = (1/(1 - mpc) = (1/(1 - .75) = 4

Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: Net factor payments from abroad

Net Factor Payment = 7 - 9 = -2

Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in prices or increases in the physical volume of output?

Nominal GDP increased by 257% while prices rose by 12.4%, indicating that the growth in nominal GDP was largely owing to increase in real ouput.

Given C = 200 + .75 (Y - T) - 500 r G = 20, T = 10, NX = 5 I = 100 - 200 r Derive the equation for planned expenditure.

Planned expenditure, Ep = C + I + G + NX = 200 + .75(Y - 10) - 500 r + 100 - 200 r + 20 + 5 = 317.5 - 700 r + .75 Y

Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: National saving

Private saving + Public saving = 30 -10 = 20

For each of the following transactions, determine the contribution to the current year's GDP. Explain the effects on the product, income, and expenditure accounts. You are informed that you have won $3,000,000 in the New Jersey State Lottery, to be paid to you, in total, immediately.

Product approach: $0 because nothing is produced. Expenditure approach: $0 because this is a transfer, not a government purchase of goods or services. Income approach: $0, because this is not a payment to a factor of production, just a transfer.

For each of the following transactions, determine the contribution to the current year's GDP. Explain the effects on the product, income, and expenditure accounts. A Japanese company builds an auto plant in Tennessee for $100,000,000, using only local labor and materials. (Hint: The auto plant is a capital good produced by Americans and purchased by the Japanese.)

Product approach: $100 million of a capital good. Since it is produced with local labor and materials, and assuming no payments go to Japanese factors of production, this is all added to U.S. GDP. Expenditure approach: $100 million net exports, since the plant is owned by the Japanese. (It is not part of gross domestic investment because the plant is not a capital good owned by U.S. residents.) Income approach: $100 million paid to U.S. factors of production.

For each of the following transactions, determine the contribution to the current year's GDP. Explain the effects on the product, income, and expenditure accounts. Hertz Rent-a-Car replaces its rental fleet by buying $100,000,000 worth of new cars from General Motors. It sells its old fleet to a consortium of used-car dealers for $40,000,000. The consortium resells the used cars to the public for a total of $60,000,000.

Product approach: $120 million composed of $100 million of new cars produced plus $20 million of sales services provided by the consortium ($60 million sales price minus $40 million cost). Expenditure approach: $100 million by Hertz as investment plus $60 million by the public for consumption of the used cars minus $40 million of investment goods sold by Hertz, for a total of $120 million. Income approach: $100 million to the factors of production of GM plus $20 million in payments to the factors of production and profits for the consortium.

For each of the following transactions, determine the contribution to the current year's GDP. Explain the effects on the product, income, and expenditure accounts. A homemaker enters the work force, taking a job that will pay $40,000 over the year. The homemaker must pay $16,000 over the year for professional child care services.

Product approach: $40,000 salary plus $16,000 childcare equals $56,000. Note that there is a sense in which the childcare is an intermediate service and should not be counted, because without it the homemaker would not be able to work. But in practice there is no way to separate such intermediate services from final services, so they are all added to GDP. Expenditure approach: $56,000 ($16,000 consumption spending on child care services plus $40,000 in categories that depend on what the homemaker spends his or her income). Income approach: $56,000 ($40,000 compensation of homemaker plus $16,000 income to the factors producing the child care: employees' wages, interest, taxes, and profits).

For each of the following transactions, determine the contribution to the current year's GDP. Explain the effects on the product, income, and expenditure accounts. The New Jersey state government pays you an additional $5,000 fee to appear in a TV commercial publicizing the state lottery.

Product approach: $5,000 worth of advertising services. Expenditure approach: $5,000 of government purchases. Income approach: $5,000 compensation of employees.

For each of the following transactions, determine the contribution to the current year's GDP. Explain the effects on the product, income, and expenditure accounts. Colonel Hogwash purchases a Civil War-era mansion for $1,000,000. The broker's fee is 6%.

Product approach: $60,000 broker's fee for providing brokerage services. Expenditure approach: $60,000 counts as residential investment made by the homebuyer. The important point here is that the transfer of an existing good, even at a higher value than that at which it was originally sold, does not add to GDP. Income approach: $60,000 income to the broker for wages, profits, and so on.

For each of the following transactions, determine the contribution to the current year's GDP. Explain the effects on the product, income, and expenditure accounts. On January 1, you purchase 10 gallons of gasoline at $2.80 per gallon. The gas station purchased the gasoline at a wholesale price (transportation included) of $2.60 per gallon.

Product approach: Gas station's value added ($0.20 x 10 gallons) = $2. Income approach: Gas stations profit = $.20 x 10 gallons = $2. Expenditure approach: Expenditure on final good by consumers ($28) + Investment (Inventory change of -$20) = $2.

Draw an IS curve for any economy. What does it represent?

The IS curve represents a relationship between the real rate of interest (r) and real GDP (Y) such that real GDP is equal to planned expenditure.

After a boat rescues everyone else from Gilligan's Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows coconuts and catches fish. Last year he harvested 1,000 coconuts and caught 500 fish. He values one fish as worth two coconuts. The Professor gave 200 coconuts to Gilligan in exchange for help in the harvest, and he gave Gilligan 100 fish in exchange for collecting worms for use in fishing. The Professor stored 100 of his coconuts in his hut for consumption at some future time. Gilligan consumed all his coconuts and fish. What are consumption and investment?

To find consumption and investment, we must find out what happens to all the coconuts and fish. Gilligan consumes all his 200 coconuts (worth 100 fish) and 100 fish, so his consumption is worth 200 fish. The Professor stores 100 coconuts with a value of 50 fish. We can treat this as 'postponed consumption' which is saving. Now, the Professor is a firm as well and the 50 fish is an increase in inventory which is equal to investment. So the Professor's consumption consists of 700 coconuts (value 350 fish) and 400 fish, for a total value of 750 fish. Thus, the economy's total consumption is valued at 950 fish and investment is 50 fish.

Given C = 200 + .75 (Y - T) - 500 r G = 20, T = 10, NX = 5 I = 100 - 200 r With r = 0.10, what is the change in the equilibrium GDP if G increases by 10?

When r = .10, and G is at 20 as stated above, Ep = 402.5 + .75 Y An increase in G of 10, i.e., ΔG = 10 will cause equilibrium real GDP (Y) to increase by ΔY = Multiplier x ΔG = 4 x 20 = 80

Given C = 200 + .75 (Y - T) - 500 r G = 20, T = 10, NX = 5 I = 100 - 200 r What is equilibrium GDP if r is equal to 0.10?

When r = 0.10, Ep = 317.5 - 700 x 0.10 + .75 Y = 247.5 + .75 Y GDP is in equilibrium when Y = Ep, i.e., Y = 247.5 + .75 Y Y - .75 Y = 247.5 Y = 990

Gross private domestic investment = 40 Government purchases of goods and services = 30 Gross national product (GNP) = 200 Current account balance = -20 Taxes = 60 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 7 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero: GDP

Y = GNP - NFP Y = 200 - (-2) = 202

Hy Marks buys a one-year government bond on January 1, 2012, for $500. He receives principal plus interest totaling $545 on January 1, 2013. Suppose that the CPI is 200 on January 1, 2012, and 214 on January 1, 2013. This increase in prices is more than Hy had anticipated; his guess was that the CPI would be 210 at the beginning of 2013. Find the nominal interest rate, the inflation rate, the real interest rate, Hy's expected inflation rate, and Hy's expected real interest rate. Nominal interest rate

[(545 - 500)/500] * 100 = 9%