Download Problem Sheet 1

Spring Term 2017
Yaşar University
Introduction to Economics II (Econ 102)
Problem Sheet 1
Measuring a nation’s income
1) Explain why an economy’s income must equal to its expenditure?
Because every transaction has a buyer and a seller, the total expenditure in the
economy must equal the total income in the economy.
2) A farmer sells wheat to a miller for $1. The miller makes the wheat into flour and sells it
to a baker for $2. The baker makes the wheat into bread and sells it to a grocer for $3.
The grocer sells the bread to the public for $4. What is the total contribution of these
transactions to GDP?
The contribution to GDP is $4, the market value of the bread, which is the final good that
is sold.
3) Many years ago Peggy paid $5000 for her car. Today she sold her car for $1000. How
does this sale affect current GDP?
The sale of used records does not affect GDP at all because it involves no current
production.
4) List the four components of GDP. Give an example for each
The four components of GDP are consumption, such as the purchase of a music CD;
investment, such as the purchase of a computer by a business; government purchases,
such as an order for military aircraft; and net exports, such as the sale of Turkish
tomato to Russia.
5) Which of the following items would you include in or exclude from GDP and why?
a) the salary of an Estonian ballet dancer making a guest appearance with Ankara Opera
House in Ankara, included
b) the profits of the PTT
included
c) social security payments to the long-term unemployed
production received in return
d) a donation
excluded since no production received in return
6) Below are some data from the land of milk and honey.
excluded
since
no
Year
Price of Milk
Quantity of Milk Price of Honey
(kilo)
Quantity
of
Honey (kilo)
2001
$1
100
$2
50
2002
1
200
2
100
2003
2
200
4
100
a.
a)
Compute nominal GDP, real GDP, and the GDP deflator for each year, using
2001 as the base year.
b)
Compute the percentage change in nominal GDP, real GDP, and the GDP
deflator in 2002 and 2003 from the preceding year. For each year, identify the
variable that does not change. Explain in words why your answer makes sense.
c)
Did economic well-being rise more in 2002 or 2003? Explain.
Calculating nominal GDP:
2001: ($1 per qt. of milk  100 qts. milk) + ($2 per qt. of honey  50 qts.
honey) = $200
2002: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts.
honey) = $400
2003: ($2 per qt. of milk  200 qts. milk) + ($4 per qt. of honey  100 qts.
honey) = $800
Calculating real GDP (base year 2001):
2001: ($1 per qt. of milk  100 qts. milk) + ($2 per qt. of honey  50 qts.
honey) = $200
2002: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts.
honey) = $400
2003: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts.
honey) = $400
Calculating the GDP deflator:
2001: ($200/$200)  100 = 100
2002: ($400/$400)  100 = 100
2003: ($800/$400)  100 = 200
b.
Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2002 = [($400 - $200)/$200]  100
= 100%.
Percentage change in nominal GDP in 2003 = [($800 - $400)/$400]  100
= 100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2002 = [($400 - $200)/$200]  100 =
100%.
Percentage change in real GDP in 2003 = [($400 - $400)/$400]  100 =
0%.
Calculating the percentage change in GDP deflator:
Percentage change in the GDP deflator in 2002 = [(100 - 100)/100]  100
= 0%.
Percentage change in the GDP deflator in 2003 = [(200 - 100)/100]  100
= 100%.
Prices did not change from 2001 to 2002. Thus, the percentage change in
the GDP deflator is zero. Likewise, output levels did not change from
2002 to 2003. This means that the percentage change in real GDP is zero.
c.
Economic well-being rose more in 2002 than in 2003, since real GDP rose
in 2002 but not in 2003. In 2002, real GDP rose and prices didn’t. In
2003, real GDP didn’t rise and prices did.
7) Complete the following table.
Year
Nominal GDP
Real GDP
GDP Deflator
1
100
$100
100
2
$120
100
120
3
$150
$125
120
a) What year is the base year? How can you tell?
deflator=100
First
year,
since
GDP
b) From year 1 to year 2, did real output rise or did prices rise? Prices rose, since GDP
Deflator rose.
c) From year 2 to year 3, did real output rise or did prices rise?
real GDP rose.
Only output rose, since