Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economics 102 Homework #1 Due: January 25th at the beginning of class Complete all of the problems. Please do not write your answers on this sheet. Show all of your work. 1. Assume that a country produces only two goods, skis and surfboards. The table below shows the prices and quantities produced by the country for each of three years. Year Price of Quantity of Price of Quantity of Skis Skis Surfboards Surfboards Year 1 $5 100 $12 200 Year 2 8 140 18 300 Year 3 12 150 17 325 a. Calculate nominal GDP in each of the three years. Nominal GDP is calculated using current prices and current quantities. So, Year1: ($5*100) + ($12*200) = 500 + 2,400 = 2,900. Year2: ($8*140) + ($18*300) = 1,120 + 5,400 = 6,520. Year3: ($12*150) + ($17*325) = 1,800 + 5,525 = 7,325. (Note: For nominal GDP both prices and quantities change) b. Calculate Real GDP in each of the three years, using Year 1 as the base year. Real GDP is calculated using base year prices and current quantities. So, Year1: ($5*100) + ($12*200) = 500 + 2,400 = 2,900. Year2: ($5*140) + ($12*300) = 700 + 3,600 = 4,300. Year3: ($5*150) + ($12*325) = 750 + 3,900 = 4,650. (Note: For real GDP only quantities change.) c. Calculate the growth rate of nominal GDP each year. The growth rate formula is: ((Year2 – Year1)/Year1) *100. Year 2 growth rate = ((6,520 – 2,900)/2,900)*100 = 124.8%. Year 3 growth rate = ((7,325 – 6,520)/ 6,520)*100 = 12.3%. d. Calculate the growth rate or real GDP each year. The growth rate formula is: ((Year2 – Year1)/Year1) *100. Year 2 growth rate = ((4,300 – 2,900)/2,900)*100 = 48.3%. Year 3 growth rate = ((4,650 – 4,300)/ 4,300)*100 = 8.1%. 2. What component (or components) of GDP would each of the following transactions affect? Also indicate whether that component would increase or decrease, and whether GDP increases or not. a. Consumption increases because a guitar is a good purchased by a household, GDP also increases (C↑, Y~). b. Investment increases because a house is considered a structure, GDP also increases (I↑, Y↑). (Note: consumption does not change.) c. Investment increases, GDP also increases. Since the definition of GDP contains the phrase ‘within the borders of a country’, even though Toyota is a foreign company the factory is being built in the U.S. therefore U.S. GDP increases. (I↑, Y↑) d. Investment increases, GDP also increases. Even though the wood is an intermediate good it is being put into inventory, and inventory is a part of investment. Next year when the wood is turned into furniture and sold, I will decrease and C will increase. (I↑, Y↑) e. There is no change to any component or GDP. Welfare benefits are a transfer payment, which do not affect GDP. An increase in consumption would be a secondary effect. The paying of the benefits themselves have no effect on GDP. (Y~) f. Government spending increases, GDP increases. (G↑, Y↑) g. Consumption increases because the car is purchased by a household, Imports increase because the car was imported from another country, these two changes offset so GDP does not change. (C↑, M↑, Y~) h. Investment decreases, Consumption increases, and GDP does not change. Even though this wine came from France it entered the country last year. So last year imports increased and inventories increased. This year the wine is simply being sold from inventory. (I↓, C↑, Y~) i. Imports increases, Exports increases and GDP does not change. Since the purchaser is not an American consumption does not change. We simply imported a toy from China and then exported it to Canada. This is an example of a transaction called re-exporting. (X↑, M↑, Y~) j. Consumption increases because a household bought a computer Investment decreases because Dell reduced its inventory, GDP does not change. (C↑, I↓, Y~) 3. Using the GDP equation and the circular flow diagram, explain in detail the assumptions that need to be made for you to reach the following conclusion I = S. Start with Y = C + I + G + X - M, Y = C + Sp + T, Sg = T – G, and S = Sp + Sg, then solve for either I or S. Then figure out any assumptions you would need to make to make the other parts of the equation equal 0. Show your work! First we need to use the two different formulas for GDP. Since they are both equal to Y, we can set them equal to each other. This gives the following equation: C + Sp + T = C + I + G + X – M. Solving for Sp and using a bit of algebra gives us the following: Sp = I + G – T + X – M. Now add Sg to both sides of the equation. Sp + Sg = I + G – T + X – M + Sg. Which simplifies to: S = I + G – T + X – M + T – G. The Ts and Gs cancel out leaving us with S = I + (X – M). In order for S to equal I, we need the (X – M) term to disappear. There are two possible assumptions that we can make to reduce this term to zero. The first is that X is equal to M. However this would only be the case if there were no international financial markets. The second option is to simply close the economy. In a closed economy there are no imports and exports allowed so both X and M are equal to zero. So we have a choice of either assuming the economy is open, but there are no international financial markets, or assuming the market is closed. The second seems to be a more useful assumption (and one we are going to make frequently in this class). The second would hold for example if we were thinking about the economy of the entire world rather than an individual country.