Chapter 2 Numerical 1 Professor Gilligan Production Coconuts 1000 Fish 500 Gilligan wages Fish 100 Stored coconuts Fertilizer 100 Price 2 coconuts per fish Wages Fish 100 Consumption Fish 100 GDP= Value of final goods produced during the year 1000 Coconuts=500 fish because 2 coconuts are worth one fish. +500 fish -100 fish (fish used as fertilizer are an intermediate good) GDP = 900 fish Gilligan consumes 200 coconuts = 100 fish + 100 fish = 200 fish Professor s consumption of durable goods 100 coconuts stored =50 fish In an ideal accounting system, these stored coconuts would be treated as investment. However, in the national income accounts, because it is so difficult to tell when durable goods are consumed and when they are saved, they are counted as consumption. Professor s consumption = 800 coconuts (400 fish) and 300 fish Total consumption = 900 fish Investment is 0 Gilligan s income=200 fish (200 coconuts +100 fish) Professor s income: 1000-200 paid to Gilligan coconuts= 800 coconut 500-100 paid to Gilligan - 100 used as intermediate good= 300 fish Professor s income= 700 fish Total income: 900 fish If the 100 fish are used as a fertilizer for next years production they are an investment as it increase future output rather than current.. In this case, GDP=1000 fish C=900 fish and I=100 fish. Professor's income is 800 fish, and Gilligan's income is 200 fish.
Numerical 2 2. a. 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. b. Furniture made in Sweden that is bought by consumers counts 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. c. 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. d. 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. Numerical 4 a- Product approach: Value added = 10*(1.4-1.3)=1 Attention: the gas station bought gas produced the previous year. It is not value added this year by another firm. Expenditure Approach: Consumption spending (14) + inventory investment (-13) Income Approach: 1 paid to factors of production at gas station (profits, wages, ) b- Product approach: Value added by broker (brokerage service) $60 Expenditure Approach: $60 for brokerage service (residential investment) Income Approach: $60 Income to the broker c- Product approach: Value added by agent $20 salary + $ 8 child care service Expenditure Approach: $ 8 consumption of child care service + $ 20 depends on products sold by firm Income Approach: Consumption and child care factors of remuneration $28 d- Product approach: $100 of a capital good (produced within US) Expenditure Approach: $100 Net Exports (plant sold to Japanese) Income Approach; $100 paid to US factors of production
e- Product approach: nothing is produced Expenditure Approach: no purchases of goods and services Income Approach: no payments of factors of production f- Product approach: $5,000 advertising services Expenditure Approach: $5,000 Gov t spending Income Approach: $5,000 Compensation of employees g- Product approach: $ 100 new cars produced (actually they were already produced) $20 sales services (60-40) Expenditure Approach: Investment by Hertz ($100) - Desinvestment by Hertz ($40)+ Investment by Consortium ($40 ) Consumption ($60) = Income Approach: 100 to factors of production of GM ( I don t think so as it might include internediate goods) 20 millions in payments Numerical 5 Numerical 5 GDP=C+I+G+NX, so C = GDP (I+G+NX) NFP = 7-9 = -2 GDP=GNP-NFP= 200 - (-2) = 202 NX-NFP=CA SO NX=CA-NFP So NX=-20 - (-2) = -18 C== 202 - (40 + 30 + (-18)) = 150. S pvt = (Y + NFP - T + TR + INT) - C = (202 + (-2) - 60 + 25 + 15) - 150 = 30. S govt = (T - TR - INT) - G = (60-25 - 15) -30 = -10. S = S pvt + S govt = 30 + (-10) = 20. a. Consumption = 150 b. Net exports = -18 c. GDP = 202 d. Net factor payments from abroad = -2 e. Private saving = 30
f. Government saving = -10 g. National saving = 20 Numerical 7 Rate of inflation: 29-30 : 50 1 100 % = 2.5% 51.3 30 31 : 45.6 1 100 % = 8.8% 50 31 32 : 40.9 1 100 % = 10.3% 45.6 32 33 : 38.8 1 100% = 5.1% 40.9 Prices declined in every period: deflation Numerical 9 π ) 3 π = 10% = 266.2/ 200 π ) P0 = P1 π ) P1 = P2 π ) P2 = P3... P1 P2 so (1 + π) =, π ) =, P0 P1 P3 π) =... P2 and then π ) 3 P3 = and P0 (1 + π) n = Pn P0
Analytical problem 1 Real GDP is not the same as welfare, people may e better off even if GDP is lower For example due to improvements on safety. This will imply less risk, accidents and an improvement on the general health of the workers. This can be more valuable than the lost GDP. In order to better evaluate the policy we would have to do a cost-benefit analysis and see if the cost of the reduced GDP is superior to the benefits to the workers wealth. Analytical problem 2. National saving does not rise because of the switch to CheapCall because although consumption spending declines by $2 million, so have total expenditures (GDP), which equal total income. Since income and spending both declined by the same amount, national saving is unchanged. Analytical problem 3 a- In a planned economy the prices do not measure the market value of the goods and services. When the prices of an item are too low, the goods are more valuable than the prices suggest. This will create excess demands for the good with the possibility of waiting lines and black market. We could use on the value of the good the time that a consumer has to spend waiting in line. If the prices are too high there is an overevaluation of the goods. There will be an excess supply and the inventories will be evaluated at a higher price than what they are worth. We can estimate the market prices (using the prices from a market economy) and use those prices for GDP calculations. b- Homework is not calculated in GDP accounts because it isn t sold in the market. Solution: Look at the standard of living relative to a market economy and estimatre the income it would take in a market economy to support that standard of living. Use census to get data on the household production. Analytical problem 4 Example from April 2000 Survey of Current Business, Table 5.1 (in billions of dollars): (Note that government saving = gross government saving minus gross government investment, and that the government deficit equals the negative of government saving.) 1998 1999 Private saving $1371.2 $1364.7 + Government saving 6.1 64.7 National saving $1377.3 $1429.4 Investment $1531.2 $1622.7 + Government deficit - 6.1-64.7 + Current account - 201.5-318.5
Total $1323.6 $1239.5 - Statistical discrepancy - 47.6-125.1 Private saving $1371.2 $1364.6 (small difference because of rounding) If gross government investment ($268.7 in 1998 and $297.8 in 1999) is included in national saving, national saving would rise by 20% in 1998 and 21% in 1999.