Download A more complex circular-flow diagram for the economy of Macronia

EC 102 – Spring 2015
Problem Session #1 (Chapter 7-Tracking the Macroeconomy):
Krugman and Wells, Ch 7:
Question 2
A more complex circular-flow diagram for the economy of Macronia is shown below.
(Note that Macronia has investment spending and financial markets.)
a. What is the value of GDP in Macronia?
…
Answer:
a. We can measure GDP in Macronia as the sum of all spending on domestically produced
final goods and ser vices. Spending consists of consumer spending, investment spending,
government purchases of goods and services, and exports less imports, or $800 ($510 +
$110 + $150 + $50 - $20).
b. Net exports are exports less imports. In Macronia, net exports equal $30 ($50 - $20).
c. Disposable income is income received by households less taxes plus government
transfers. In Macronia, disposable income equals $710 ($800 - $100 + $10).
d. Yes. Consumer spending plus taxes plus private savings equals $810—the same as the
wages, profit, interest, rent, and government transfers received by households.
e. In Macronia, the government needs to finance $160 in spending ($150 on purchases of
goods and services and $10 in government transfers). The government finances $100 of
its spending with tax revenue and the other $60 through borrowing in financial markets.
Question 6:
Which of the following transactions will be included in GDP for the United States?
a. Coca - Cola builds a new bottling plant in....
Answer:
a. When Coca-Cola builds a new bottling plant, it is investment spending and included in
GDP.
b. If Delta sells one of its airplanes to Korean Air, this transaction is not included in GDP
because it does not represent production during the current time period. The airplane
would have been included in GDP when it was produced; now it is just a sale of a used
item.
c. When an individual buys an existing share of stock, the transaction is not included in
GDP because there is no production.
d. If a California winery sells a bottle of Chardonnay to a customer in Montreal, it is a U.S.
export and is entered as such in U.S. GDP.
e. When an American buys a bottle of French perfume, it is a consumption expenditure as
measured by GDP. But since it does not represent production in the United States of
either perfume manufacture or perfume retailing, it is also deducted from GDP as an
import. The net effect of the transaction does not change GDP in the United States.
f. If a book publisher produces too many copies of a new book and the books don’t sell in
the year they are produced, the publisher adds the surplus books to inventories. These
books are considered investment spending and added to GDP. It is as if the publisher
bought the books itself.
Question 7:
The economy of Britannica produces three goods: computers, DVDs, and pizza. The
accompanying table shows...
Answer:
a. From 2010 to 2011, the percent change in the production of computers is 5.0% (equal to
((10.5 – 10)/10) × 100); of DVDs, 5.0% (equal to ((105 – 100)/100)× 100); and of pizza,
0% (equal to ((2 – 2)/2) × 100). From 2011 to 2012, the percent change in the
production of computers is 14.3% (equal to ((12 – 10.5)/10.5) × 100); of DVDs, 4.8%
(equal to ((110 – 105)/105) × 100); and of pizza, 50.0% (equal to ((3 – 2)/2) × 100).
b. From 2010 to 2011, the percent change in the price of computers is 11.1% (equal to
(($1,000 – $900)/$900) × 100); of DVDs, 20.0% (equal to (($12 – $10)/$10) × 100); and
of pizza, 6.7% (equal to (($16 – $15)/$15) × 100). From 2011 to 2012, the percent
change in the price of computers is 5.0% (equal to (($1,050 – $1,000)/$1,000) × 100); of
DVDs, 16.7% (equal to (($14 – $12)/$12) × 100); and of pizza, 6.25% (equal to (($17 –
$16)/$16) × 100).
c. Nominal GDP for each year is calculated by summing up the value of the three goods
produced in that year:
Year Nominal GDP Percent change in nominal GDP
2010 $10,030
2011 11,792 17.6% = (($11,792 − $10,030)/$10,030) × 100
2012 14,191 20.3% = (($14,191 − $11,792)/$11,792) × 100
d. Real GDP in 2010 prices is calculated by summing up the value of the three goods
produced each year using 2010 prices:
Real GDP
Year (2005 dollars) Percent change in real GDP
2010 $10,030
2011 10,530 5.0% = (($10,530 − $10,030)/$10,030) × 100
2012 11,945 13.4% = (($11,945 − $10,530)/$10,530) × 100
Question 9:
Eastland College is concerned about the rising price of textbooks that students must
purchase. To better identify the increase in…
Answer:
a. The percent change in the price of an English textbook from 2010 to 2012 is 14.0% (equal
to (($57 – $50)/$50) × 100).
b. The percent change in the price of a math textbook from 2010 to 2012 is 5.7% (equal to
(($74 – $70)/$70) × 100).
c. The percent change in the price of an economics textbook from 2010 to 2012 is 25% (equal
to (($100 – $80)/$80) × 100).
d. To create an index of textbook prices, you must first calculate the cost of the market basket
(three English, two math, and four economics textbooks) in each of the three years; then normalize
it by dividing the cost of the market basket in a given year by the cost of the market basket in the
base period; and then multiply by 100 to get an index value (base period of 2010 = 100).
Cost of textbooks in 2010 = (3 × $50) + (2 × $70) + (4 × $80) = $610
Cost of textbooks in 2011 = (3 × $55) + (2 × $72) + (4 × $90) = $669
Cost of textbooks in 2012 = (3 × $57) + (2 × $74) + (4 × $100) = $719
Index value for 2010 = ($610/$610) × 100 = 100
Index value for 2011 = ($669/$610) × 100 = 109.7
Index value for 2012 = ($719/$610) × 100 = 117.9
e. The percent change in the price index for textbooks from 2010 to 2012 is 17.9% (equal to
((117.9 – 100)/100) × 100).