Download chapter 18 - production, income, and employment

CHAPTER 6 - PRODUCTION, INCOME, AND EMPLOYMENT
PROBLEM SET
2. a. The $700 per month in imputed rent on the home and the $500 in imputed rent on
the condo are irrelevant to computing the change in GDP. While these housing
units are changing hands, they are continuing to provide the same services as
before. Similarly, the sales price of the home and the condo do not affect GDP,
since these housing units were presumably produced (and counted in GDP) in
some previous year. The sales commission on the condo—6% of $200,000 =
$12,000—is the value of a currently produced service. Thus, GDP rises by
$12,000.
b. Using the expenditure approach, GDP rises by $75 million—the value of final
sales. (Alternately, we could also use the factor payments approach, noting that the
intermediate goods cost of $10 million will create an equal amount of factor
payments elsewhere in the economy. GE’s profit is its revenue minus its costs, or
$75 million – ($10 + $40 + $15) = $10 million. Finally, wages and salaries and
interest paid by GE total $40 + $15 = $55. Adding together all of these factor
payments, we have $10 + $10 + $55 = $75 million.)
c. As a result of your decision, you will buy $50 less in nachos for the next 9 months.
Assuming that nacho producers respond by cutting back production of nachos,
GDP will fall by $50  9 = $450. However, you also spend $200 on goods to make
your own nachos. Since you are not a firm, but a household, all of your
purchases—including the raw materials—are considered final consumption goods.
Thus, the net effect on GDP is –$450 + $200 = –$250.
d. The lottery winnings are a transfer payment by the government; they are not
included in GDP because nothing is produced. However, there is a $10,000
increase in GDP; that is, a $25,000 increase in investment minus a $15,000
increase in imports.
e. GDP rises by the full value of the CDs produced, or $15  100,000 = $1,500,000.
(Two components of GDP are affected: exports increase by $15  10,000 =
$150,000; and investment increases by $15  90,000 = $1,350,000.)
4. The unemployment rate would have been (14.7 million + 4.4 million)/(140.2 million +
14.7 million) = .1233, or 12.3%.
6. You should explain to her that the money she spent showed up as part of consumption
spending, which caused consumption spending to overstate production in the U.S.
Therefore, the purchase price of the sweater was also added to imports, and imports
were then subtracted from GDP to offset the overstatement.
8.
a. The unemployment rate = 2140/(2140 + 46,000)= 4.4%.
b. There are 48,140 people in Ziponia’s labor force.
Chapter 6 Production, Income, and Employment
c. There are 200 discouraged workers in Ziponia.
d. The missing 1800 citizens (= 60,000 – 9,000 – 600 – 60 – 200 – 46,000 – 2,140 –
200) are not in the labor force. Perhaps they are retired, full time students,
independently wealthy, or stay-at-home parents.
e. 11,860 (including those under 16, and those over 16 who are either in the military
service, in hospitals, in prison, not working but who would take a job, or who are
referred to in part (d).)
10.
a. The effect of capital destruction was 0.1 x $20.1 billion = $2.01 billion in lost GDP.
As a fraction of the U.S. total for 2001, that was $2.01 billion/$10 trillion = 0.0002, or
2/100 of 1 percent.
b. Before the attacks, Manhattan’s share of U.S. GDP would have been .015 x $10
trillion = $150 billion. If the disruption caused a loss of half Manhattan’s output for 2
weeks, that’s equivalent to losing its entire production for 1 week -- $150 billion/52 =
$2.88 billion.
For the quarter, U.S. GDP would have been approximately $10 trillion/4 =
$2.5 trillion. Therefore the disruption would have caused a loss of $2.88 billion/$2.5
trillion = .00116, or about 1/10 of 1 percent.
c.
For the entire year, the effect of disruption would have been $2.88 billion/$10 trillion
= .0003, or about 3/100 of 1 percent of annual U.S. GDP.
12. a. The U.S. production decreased by 5.4%/4 = 1.35% going from the third to the fourth
quarter. Since we do not annualize, simply divide the relevant growth rate by 4.
b. We can calculate this by dividing each quarterly growth rate by 4 and adding them up,
-0.7/4 + 1.5/4 – 2.7/4 – 5.4/4 = – 1.83%. Or, we could simply average the growth
rates, (-0.7 + 1.5 – 2.7 – 5.4)/4 = – 1.83%. Note, however, that we cannot solve the
question by finding the percent difference between the first quarter of 2008 and 2009
as that includes compounding, while the question instructs us to ignore it.
MORE CHALLENGING QUESTIONS
14. All of the changes caused by the need for extra security increase the quantity of
resources needed to produce any give quantity of final goods and services. Therefore,
for a given total of resources available, real GDP will decrease. The extra resources
will have to come from somewhere (a newly-hired security guard was working to
produce some other product before being recruited as a guard). (Note that this is
exactly the opposite effect of a technological advance, which works to decrease the
quantity of resources needed to produce a given quantity of final goods, and tends to
raise real GDP for any given quantity of resources.)