Download Disc #3: Ch 7 Answers

BG 2400 Discussion #3 and Answers
Date: Week of Jan 23-27
Coverage: Ch 7
1.
W2017
An example that demonstrates income=output=expenditure.
(i)
Output: Your workday lasts from 9:00am-12:00pm in a sidewalk doughnut stand. During this
time period, you produce 12 dozens of doughnuts. Each dozen sells for 50 baht. What is the
value of your GDP as defined by total output?
Ans: 50*12=600 baht.
(ii)
Income: Suppose by the end of the morning, you get paid. You are your own boss, so you
pay yourself __Ans: 600 baht__. This is the value of your income.
(iii) Expenditure: Once you have gotten paid, you go shopping for clothing, pay your rent, buy
gas for your car, etc. For simplicity, you do not save anything and you do not borrow from
anyone. What must be the amount of your expenditure?__Ans: 600 baht__.
2.
GDP
Consider the following table:
Item
Government Purchases of Goods and Services
Wages, Salaries, etc Paid to Labour
Indirect Taxes
Changes in Inventories
Profits
Export Earnings
Consumption Expenditure
Other Income
Imports
Depreciation
Fixed Capital Formation
(i)
Amount ($billions)
60
185
30
10
20
30
180
25
25
10
15
Use the Aggregate Expenditure approach to find the value of GDP.
Ans: GDP = C + I + G + NX = (C = 180) + (I = Fixed capital formation +Changes in
inventories, so total I = 25) + (G = 60) + (NX = 30 - 25 = 5) = 270.
(ii)
Use the Income approach to find the value of GDP.
Ans: GDP = Wages = 185 + Profits = 20 + Other Income = 25 + Depreciation = 10 +
Indirect taxes = 30 = 270.
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3.
Consider the following data on GDP:
Year
1991
1992
1993
1994
Nominal GDP
500
540
560
?
Real GDP
525
?
?
550
Price Index
?
100
105
108
Leave all answers to two decimal places, if applicable.
(i)
Calculate the price index for 1991.
Ans: 95.24.
(ii)
Calculate the real GDP for 1992 and 1993, respectively.
Ans: The general equation is price index = (Nominal/Real)*100. Real GDP for 1992=540
and real GDP for 1993=533.33.
(iii) Calculate the nominal GDP for 1994.
Ans: Nominal GDP = 594.
4.
Real GDP versus Nominal GDP:
The isolated island of Castaway is an economy that produces only pineapples and coconuts. In
2014, pineapples cost $2, and in 2015, they cost $2.80. Coconuts cost $0.35 in 2014, and in 2015,
they cost $0.49.
Leave all answers to two decimal places, if applicable.
(i)
In 2014, 50 pineapples and 100 coconuts were produced in Castaway. What was the GDP of
Castaway in 2014?
Ans: GDP = 50*$2 + 100*$0.35 = $135.
(ii)
In 2015, Castaway produced 53 pineapples and 94 coconuts.
(a) What was the nominal GDP in 2015?
Ans: Nominal GDP = 53*$2.8 + 94*$0.49 = $194.46.
(b)
What was the real GDP in 2015 (using 2014 prices)?
Ans: Real GDP = 53*$2 + 94*$0.35 = $138.90.
(c)
Compare your answers in parts (a) and (b): Are the values of your answers different
because Castaway has become more productive in 2015 compared to 2014, or is it
because of higher prices in 2015 compared to 2014? Explain.
Ans: Prices have become higher. Quantities have not changed – all the quantities
are from 2015.
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