Download Document

Chapter Two Answers
1
How has the type of investment undertaken in New Zealand changed since 1989? Use the
data in Table 2.2 to show trends and comment on possible reasons for this trend.
The best way to see the change is to calculate the percentage increase in each category.
The total has grown 82% but within this, by far, the largest increase has been in
residential buildings (164%). This is now nearly 30% of the total of new investment in
2003 compared to around 21% in 1989. The increased investment reflects a growing
population, speculation and a strong property boom in the 2000s. Transport equipment is
also much larger reflecting more freight carried by road and investment in trains, ships
and airplanes. Non residential and other construction has shown the smallest increase.
Table 2.2 Gross capital formation by types of capital good 1989-2003
Residential
Buildings
NonResidential
Buildings
Other
Construction
$(million)
Land
Improvements
Transport
Equipment
Plant
Machinery &
Equipment
Intangible
Assets
Total
March Year
1989
2,812
2,950
1,470
174
1,158
4,474
608
13,647
1991
3,457
2,413
1,471
180
1,656
4,711
534
14,421
1992
2,992
1,595
1,639
198
1,515
3,715
318
11,972
1994
3,883
1,888
1,159
240
2,199
5,299
367
15,035
1995
4,815
2,502
1,226
221
2,473
6,106
403
17,747
1997
5,699
3,158
2,012
303
2,778
6,449
479
20,877
1999
5,143
3,010
2,254
306
2,206
6,064
731
19,713
2001
5,478
3,132
2,257
362
2,301
7,048
970
21,548
2003
7,443
3,672
2,127
404
2,897
7,358
972
24,873
165
24
45
132
150
64
60
82
%increase
2. Read Boxes 3.4 and 3.5 on the underground economy and construct the counter
argument that the black economy actually might serve a useful purpose.
While no one condones deliberate tax evasion by businesses, some ‘underground’ or
informal activity may be a useful lubricant in a market economy. Some points that may
be made:
 We all work in black economy to some extent, e.g. with home improvements,
do-it-yourself activities, helping friends and so on.
 Small jobs may be more efficiently paid for with cash.
 It allows casual employment, e.g. child-caring and gardening.
 It may help people to escape poverty. The problem of very high effective
marginal tax rates (combination of tax and reduction of social assistance as extra
income is earned) may make extra income not worth having, yet the social welfare
benefit itself may be too low to live on. It should be noted that this is not permitted
as a reason for not declaring income for those on benefits.
3. Consider the following two-firm economy. Firm A is a mining company that
sells all its output to Firm B, which in turn sells all its output to consumers.
Firm A
Firm B
Total sales
$1 000
$3 400
Wages
800
1 600
Profits
200
800
Purchases from other firms
0
1 000
(a) What are the total sales for the economy?
(b) What is the total value of sales for final uses?
(c) What is the total of all factor incomes?
(d) What is the value added for firm A?
(e) What is the value added for firm B?
(f) What is the total value added of both firms?
(g) What is GDP?
(h) What is national income?
$4 400
$3 400
$3 400
$1 000
$2 400
$3 400
$3 400
$3 400
4. To what extent is Gross Domestic Product as derived in the New Zealand National
Accounts a useful measure of:
(a) The standard of living?
 GDP needs to be changed into per capita GDP by dividing it by the size of the
population. Even then this does not give information about how income
is actually distributed among the population.
 GNP per capita is a better measure of the standard of living earned by the
country rather than GDP per capita as uit reflects the income actually retained by
New Zealanders.
 GDP is a minimum estimate of value or worth as market prices do not include
consumer surplus. For example, it counts government output at cost.
 GDP omits many important aspects of a standard of living, e.g. access to clean
water and fresh air and unpolluted beaches, the quality of healthcare, the value of
unpaid activity.
(b) A measure of total output?
Measured GDP does not include production of all goods and services. Some examples are:
 illegal output – drug dealing
 imputed income, i.e the non-cash income from owning assets, except owneroccupied housing where a rental income is imputed.
 unpaid home activity, housework, repairs, childminding
5. Why is the distinction between short-run and long-run economic growth important?
What are some of the factors that are important to steady long-term growth?
Most short-run growth just reflects the state of the business cycle. Coming off a low base
of a recession for example, the increase in output per quarter can be large. This sharp
recovery phase is not sustainable in the long run. Long-run growth reflects rising
productive capacity of the economy. The main factors influencing long-term growth are
as follows:
 Investment in productive capacity especially new technology.
 Investment in education of the workforce.
 Appropriate immigration policy to attract skilled workers.
 Appropriate long-term and short-term economic policy to enhance business
confidence.
 Political stability.
6. This question is based on the following table:
Year
1985
2000
Cost of a hamburger Price Index
$1.50
1000
$4.50
1650
Which of the following is true?
a.
Prices have risen 165% between 1985 and 2000.
% increase in prices = (1650 – 1000) 100 = 65% => False
1000
b. Hamburgers have become relatively more expensive than other goods.
% increase in price of hamburgers = (4.50 – 1.50) 100 = 200%
=> hamburgers have increased in price by 200% whereas overall prices
have only increased by 65% => True
c.
For the price of one hamburger in 2000 dollars, three could have been bought in
1985.
$4.50 in 1995 dollars is only $2.73 in 1980 dollars. Hence only one
and a bit (actually 1.82) hamburgers could be bought in 1980, not 3.
=> False
d. By 2000 the same typical basket of consumer goods will be consumed as was in
1985.
False. Although we cannot tell from the table, the introduction of home
computers and various other electronic goods (mobile phones, etc.) as well
as changing consumer tastes would tend to indicate that the typical basket
would have changed between 1985and 2000.
In practice, the weightings of items in the basket are adjusted every five
years to account for shifts in consumer patterns. Past index data is then
adjusted by simple ratio-ing to reflect the base year = 1000.
7. Nominal GDP rose from around $71 billion in 1991 to $126 billion in 2003. What
factors would you need to consider before concluding that living standards of New
Zealanders had improved
 This is only nominal income, so the 77% growth does not mean 77% more actual
growth of goods and services. Nominal GDP must be adjusted to real GDP (see
page 48). Real GDP growth is much less (real GDP in 1991 is approx 79 b and in
2003 is 113.8 b so real growth is 44% (note: question has taken approximate figures
for 1991 and 2003).
 Real GDP must then be adjusted for the change to the population base.
Between 1991 and 2003, the population grew 14.2% (3.5m to 4.0m). Real
per capita GDP growth is approximately 25%
( 79000/3.5 - 113000/4)/ 22 571)x100 = 25%
 We also need to know something of the distribution of income since the growth
might have only benefited the highest income group.
 We should consider the nature of the increase in GDP and supplement GDP data
with other quantity of life indicators.
 GNP per capita is a better indicator of the income actually available to New
Zealanders. GNP is less than GDP because New Zealand has large net international.
Investment flows abroad.