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MACROECONOMICS I 1 SEMINAR 1 DEFINITIONS • gross domestic product (GDP) The market value of an economy’s domestically produced goods and services over a specified period of time, such as a year (nominal GDP). Current year prices used in calculation. • real GDP 2 The real value of the nominal gross domestic product. Base year prices used in calculation. CALCULATING GDP • Production approach Multiply the output of each sector by their respective market price and add them together • Expenditure approach Calculate the sum of the final uses of goods and services (all uses except intermediate consumption) Y = C + I + G + (X − M) • Income approach 3 • Y=R+W+π 4 PROBLEM 1 You are given the following information about the economy: • • • • Consumption = $1000 Government Expenditures = $700 Net Exports = -$100 Private Investment = $400 5 What is the value of GDP? PROBLEM 2 Suppose an economy’s national accounts are • • • • • GDP = 100 C = 70 I = 40 G = 20 EX = 20 6 Using the national income identity find the value of imports (IM). PROBLEM 3 A) Suppose Bethlehem Steel sells $2,000 worth of steel to Ford Motor Company, other producers sell $5,000 worth of other inputs to Ford; Ford then uses the steel and other inputs to make an Escort which it sells to Motor Twins for $12,000. Then, the car dealership sells the Escort to an accounting professor for $15,000. − What is the total contribution to GDP made by this entire series of transactions? B) Suppose the accounting professor bargains hard, and pushes the car dealerships price down to $12,200. 7 – What is the total contribution to GDP then? – Does this difference make sense to you? PROBLEM 4 An economy has the following sectors: private households, flour producers and bread producers. • The flour producers pay their workers EUR 200 and sell 300 kilos of flour to the bread makers and 240 kilos of flour to final consumers. • The price for one kilo of flour is EUR 0.5. • The bread producers pay their workers EUR 220 and sell 175 kilo bread to domestic consumers • Moreover, 75 kilo of bread are exported. • The price for one kilo bread is EUR 2. A) Describe in detail the 3 possibilities of calculating GDP and calculate the GDP for the economy using one of these possibilities. 8 B) Suppose that due to more efficient production techniques the price of bread decreases from EUR 2 to EUR 1.5 in the next period. Moreover, assume that the price of flour and the consumed quantities do not change. Calculate the inflation rate based on the GDP deflator. PROBLEM 5 Suppose that the total population on the 1st of January 2001 was 40 mil. people, of which 30 mil. were above the age of 16. Suppose that among the latter, 12 mil. people were not active and 2 mil. unemployed. 800,000 people are expected to turn 16 during 2001 and half of them are expected to keep studying and not to seek a job, while the other half is expected to seek a job and be ready to start working immediately. 9 How many people have to find a job during 2001 for the unemployment rate to be 8%? PROBLEM 6 Explain why each of the following would not be included in GDP. 10 A) You buy a used bike for USD 50 in a yard sale B) A taxi driver buys gasoline for his cab. PROBLEM 7 (HW) Consider an economy which produces just 4 goods: clocks, key chains, bananas, and telescopes. Relevant price and output information is contained in the table below: Product Price 05 Output 05 Price 07 Output 07 Clocks $100 25 units $110 30 units Keychains 1 100 2 80 Bananas 2 500 2 900 Telescopes 150 100 185 150 11 – Calculate the growth rate of real GDP between 2005 and 2007 for this economy using firstly 2005 as a base year and then 2007 as a base year. Calculate also the nominal GDP in both years.