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Economics 102 Introductory Macroeconomics - Spring 2006, Professor J. Wissink
Problem Set 3 – DUE at the start of class on Monday Feb 27, 2006
Boxes will be removed ten minutes after the start of class.
Remember: We will NOT accept problem sets late. Period.
Thanks for minding this policy and not asking if you can hand it in late.
Multiple Choice
1. Tom just bought shares of Google stock for $2,000 and paid a $30 commission to his broker. How did
this affect GDP?
a)
b)
c)
d)
GDP increased by $2030.
GDP increased by $2000.
GDP increased by $1970.
GDP increased by $30.
2. An economy which is experiencing rising rates of unemployment and inflation would be said to be in a
period of:
a)
b)
c)
d)
inflation
recession
stagflation
hyperinflation
3. Which of the following are examples of intermediate goods? (There is more than one in this list.)
a)
b)
c)
d)
e)
a book written by your favorite author purchased by you
dough bought by a housewife to bake a cake for her daughter’s birthday
dough bought by a chef to bake a cake at his restaurant
a set of screwdrivers purchased by a small firm
wood purchased by a professional carpenter
True and False and EXPLAIN
4. True or False and EXPLAIN: The $15,000 spent by a furniture firm in replenishing their inventories is
not counted in GDP since it is neither consumption, nor investment, nor government expenditures.
5. True or False and EXPLAIN: The income of foreigners working in the U.S. is counted in the U.S. GNP as
long as those foreigners work for a U.S. company.
6. True or False and EXPLAIN: Final sales of $10,000 worth of cocaine are counted in the GDP calculations
because its production involved the 4 factors of production.
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7. The small and isolated island of Bithaca has no contact with the outside world. Only two firms operate in
this economy: Joe & Bros. Farm which produces wheat, and Big Bakery, which makes bread (the only
final product in the economy) using the wheat provided by Joe & Bros. Farm. The following data are
given for the year 2005.
Joe & Bros.
($)
Total output
Total Expenses
Wages
Rent & Interest
Intermediate Goods Purchased
50,000
Big Bakery
($)
150,000
27,000
4,000
0
51,500
9,000
?
a) Answer the following questions:
i.What is the value of the intermediate goods purchased by Big Bakery?
ii.What is the value added to GDP by Joe & Bros.?
iii.What is the value added to GDP by Big Bakery?
iv.What is the GDP for Bithaca? Show your calculations.
v.What is the GNP for Bithaca? Show your calculations.
b) Assume that although Big Bakery produces $150,000 worth of bread it is only able to sell
$125,000. The remaining $25,000 thousands worth of bread is stored. What is the GDP of
Bithaca now?
8. Suppose the following data apply to the United States for the year 2004 (all figures are in billion of dollars).
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Depreciation
Personal consumption expenditures
Rental income
Government expenditures on goods and services
Net interest
Compensation of employees
Proprietors’ Income
Indirect taxes less subsidies
Corporate profits
Gross private investment
Net exports
Net factor payments to the rest of the world
1,500
8,231
163
2,183
546
6,765
946
803
1,118
1,922
-609
-114
Assume that all income and expenditure data not listed above is equal to zero.
a)
Compute gross domestic product (GDP) using the expenditure approach. Show what numbers
you used.
b)
Compute gross domestic product (GDP) using the income approach. Show what numbers you
used.
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9. Freestone is an isolated community that produces only three final goods: pizza, notebooks, and tonic
water. Information on population, nominal prices and total output for each good in the years 1980 and
2004 is given below.
pizza
notebooks
tonic water (bottle)
1980
per unit Price
Output
($’s)
(in millions)
1.00
1
4.00
4
1.50
2
2004
per unit Price
Output
($’s)
(in millions)
2.75
3
7.00
10
2.50
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NOTE: THE POPULATION IN 1980 IS 10,000 AND IN 2004 IS 15,000
a) Calculate nominal GDP for 1980.
b) Calculate nominal GDP for 2004.
c) Calculate real GDP for 1980 and 2004 if the BASE YEAR is 1980.
d) Has the standard of living increased or decreased since 1980? HINT: compare real GDPs per
capita.
e) Calculate real GDP for 1980 and 2004 if the BASE YEAR is 2004.
f)
What is the implicit GDP deflator for 1980 and for 2004? (Use 1980 as the base year.)
g) By what percent has the price level increased between 1980 and 2004?
(Use GDP deflators from part f as price indices).
h) Assume that the base year is 1980 and in the basket purchased by the representative consumer is
one pizza and one bottle of tonic water. What is CPI for 1980? What is CPI for 2004? What is an
average annual rate of inflation? (Hint: to get the average annual rate of inflation just divide the
overall percentage price change from 1980 to 2004 by 24 years).
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