Download HW6 answers - gozips.uakron.edu

146998289
Foundations of Economic Analysis
Homework #6
Stratton
Name ________Key___________
Objective: to provide practice and assessment of your understanding of how economic activity is
measured in the U.S. Your ability to demonstrate understanding, insight and/or the ability to use
the material is the primary purpose of the assessment. Thus full credit will only be earned if you
follow the directions carefully and provide the explanation, description, and thought process as
directed. Each numbered question is worth 2 points – total 50 points.
Instructions: In your own words explain the key differences for each pair of terms, of the term(s)
in the space provided or attach additional sheets if necessary.
Terms:
1.
Consumer price index and GDP deflator – CPI and GDP deflators are both measures of
absolute price level. CPI uses a fixed market basket of goods based on average urban
household spending patterns as its basis, while GDP uses total current production as its
basis. Also, CPI uses an historical base year, while GDP deflator uses the current year as
its base year.
2.
The rate of inflation and the core rate of inflation – The rate of inflation is a measure of
how fast average prices are rising and is measured by the percentage change in a price
index. The key difference is that the core rate of inflation excludes the volatile energy and
food sectors in its calculations.
3.
Expansion and Recession – Expansion is when real output growth is positive. That part of
the business cycle in which several measures of economic activity indicate real growth.
Recession is officially defined as 2 or more consecutive quarters of negative real growth.
That part of the business cycle in which several measures of economic activity indicate
decline in real production.
4.
Fiscal Policy and Monetary Policy – Both are policies designed to dampen the business
cycle by either stimulating or restraining production in an anti-cyclical fashion. Fiscal
policy is conducted by the federal government, while monetary policy is conducted by
the FED. Fiscal policy uses changes in government spending and/or taxes by a national
government to influence economic activity, while monetary policy uses the money stock
and interest rates.
5.
Inflation and deflation – Inflation is the general increase in the absolute price level.
Deflation is the decline in the absolute price level.
6.
Labor force and employed persons – The labor force consists of all individuals in the
working age population who are either employed or looking for employment. One is
considered employed if they worked for pay last week, was self-employed, worked for
family business for 15 hours or more, or was temporarily absent from their job due to one
of several conditions, including illness. Thus the employed make up part of the labor
force. The unemployed make up the rest of the labor force.
1 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Stratton
7.
Natural rate of unemployment and the current rate of unemployment – The minimum
unemployment rate which current institutions allow without causing inflation to
accelerate. The current rate of unemployment is the ratio of those currently classified as
unemployed to the labor force.
8.
Nominal GDP and Real GDP – Nominal GDP is the value of all final goods and services
produced in a country during a specified time period (usually 1 year) priced at current
prices. Real GDP is the value of all final goods and services produced in a country during
a specified time period (usually 1 year) priced at constant (or chained) prices.
9.
Saving and investment – Saving is done by households and is disposable income not
consumed. It is often placed in a variety of instruments that earn interest. Investment is
the purchase of a good or service which increases society’s productive capacity. Saving is
a leakage out of the circular flow; investment is an injection into the flow.
2 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Stratton
Scenario 1: The Bureau of Economic Analysis provides data on GDP. One approach to
calculating GDP is the expenditures approach. Use the BEA web site (as cited in your text) to
obtain the expenditure data for the following questions. Be sure to answer the questions as
completely as you can. If calculations are requested, show your work!
Table 1.1.5. Gross Domestic Product, current dollars
[Annual data in billions of dollars]
Bureau of Economic Analysis
Downloaded on 11/10/2006 Last Revised on October 27, 2006
Line
1 Gross domestic product
2 Personal consumption expenditures
3 Durable goods
4 Nondurable goods
5 Services
6 Gross private domestic investment
7 Fixed investment
8 Nonresidential
9
Structures
10
Equipment and software
11 Residential
12 Change in private inventories
13 Net exports of goods and services
14 Exports
15 Goods
16 Services
17 Imports
18 Goods
19 Services
20 Government consumption expenditures and gross investment
21 Federal
22 National defense
23 Nondefense
24 State and local
2003
10960.8
7703.6
942.7
2190.2
4570.8
1664.1
1649.8
1077.4
277.2
800.2
572.4
14.3
-499.4
1040.8
724.4
316.4
1540.2
1283.9
256.2
2092.5
756.4
497.2
259.2
1336
2004
% change
11712.5
7.0%
8211.5
6.5%
986.3
4.0%
2345.2
8.2%
4880.1
6.3%
1888
15.4%
1830.6
13.2%
1155.3
10.8%
300.8
7.8%
854.5
11.8%
675.3
17.7%
57.3
259.7%
-613.2
24.6%
1178.1
12.3%
818.8
13.0%
359.3
10.7%
1791.4
16.2%
1495.2
16.5%
296.2
15.0%
2226.2
5.9%
825.9
9.6%
551.2
11.3%
274.7
6.5%
1400.3
3.8%
10. Why are the data on GDP (in current dollars using annual data) for 2003 different from
the data in your textbook, Table 11.2)? – The current data was revised August 31, 2005,
substantially after the printing of the textbook.
11. How much did private inventories change (percentage) between 2003 and 2004? What
can you infer from this change in inventories? – Inventories increased by over 250%.
(See table above.) These data indicate that inventories increased rather substantially
between the end of 2003 and the end of 2004. I can infer then that production outpaced
sales during 2004. This might be caused by production increasing faster than sales
(businesses were overly optimistic about the rate of the expansion) or by sales slowing
faster than production (businesses might not have reacted quickly to slowing rate of
expansion). In either event, I would expect businesses to reevaluate their production plans
downward for 2005.
3 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Table 1.1.6. Real Gross Domestic Product, Chained Dollars
[Annual data in billions of chained (2000) dollars]
Bureau of Economic Analysis
Downloaded on 9/21/2005 At 9:28:46 AM Last Revised August 31, 2005
Line
2003
1
Gross domestic product
10301
2 Personal consumption expenditures
7295.3
3 Durable goods
1020.6
4 Nondurable goods
2103
5 Services
4178.8
6 Gross private domestic investment
1613.1
7 Fixed investment
1596.9
8
Nonresidential
1081.8
9
Structures
243.5
10
Equipment and software
843.1
11
Residential
509.4
12 Change in private inventories
14.3
13 Net exports of goods and services
-518.9
14 Exports
1026.1
15
Goods
719.8
16
Services
306.2
17 Imports
1545
18
Goods
1309.3
19
Services
236.6
20 Government consumption expenditures and gross investment
1904.8
21 Federal
687.1
22
National defense
449
23
Nondefense
238
24 State and local
1217.8
25 Residual
3.4
Note. Chained (2000) dollar series are calculated as the product of the
chain-type quantityindex and the 2000 current-dollar value of the corresponding
series, divided by 100. Because the formula for the chain-type quantity indexes
uses weights of more than one period, the corresponding chained-dollar estimates
are usually not additive. The residual line is the difference between the first
and the sum of the most detailed lines.
Stratton
2004
% change
10703.5
3.9%
7577.1
3.9%
1085.7
6.4%
2179.2
3.6%
4323.9
3.5%
1770.6
9.8%
1713.9
7.3%
1145.8
5.9%
248.7
2.1%
904.2
7.2%
559.9
9.9%
53.4
273.4%
-590.9
13.9%
1120.4
9.2%
784.4
9.0%
335.9
9.7%
1711.3
10.8%
1452.2
10.9%
260.3
10.0%
1940.6
1.9%
716.6
4.3%
475.4
5.9%
241
1.3%
1223.9
0.5%
0.4
-88.2%
12. What percentage of “real” GDP (GDP, chained dollars using annual data) is represented
by investment expenditures (Gross Private Domestic Investment) in 2004? (I/GDP) =
(1770.6/10703.5) = 16.5%
What percentage of “real” GDP represents net exports in 2004?
(NX/GDP) = (-590.9/10703.5) = -5.5%
13. Calculate the GDP deflator for 2003 and 2004? – The GDP deflator is Nominal GDP /
Real GDP. In this case for 2003 GDP deflator = (10,960.8 / 10301.0) * 100 = 106.4; and
for 2004 GDP deflator = (11,712.5 / 10703.5) * 100 = 109.4.
14. Using the answers in the above question, estimate the rate of inflation during 2004. – The
rate of inflation is % change in the price index. In this case the inflation rate for 2004 =
(109.4 – 106.4) / 106.4 = 3.0 / 106.4 = 2.82%.
4 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Stratton
Scenario 2: The Bureau of Economic Analysis provides data on GDP. Another approach to
calculating GDP is the incomes approach. In this approach payment to the factors of production,
valued at factor market prices, is used to estimate economic activity. To determine GDP (valued
at product market prices) requires some adjustments. Below is a summary of the relevant BEA
tables from the BEA web site. (Similar to Table 11.3 in your text.) Use these data for the
following questions. Be sure to answer the questions as completely as you can. If calculations are
requested, show your work!
Table 1.7.5. Relation of Gross Domestic Product, Gross National Product,
Net National Product, National Income, and Personal Income
[Billions of dollars]
Bureau of Economic Analysis
Downloaded on 11/10/2006 Last Revised on October 27, 2006
Line
1 Gross domestic product
2 Plus: Income receipts from the rest of the world
3 Less: Income payments to the rest of the world
5 Less: Consumption of fixed capital
15 Less: Statistical discrepancy
16 Equals: National income
17 Less: Income earned, but not received
24 Plus: Income received, but not earned
26 Equals: Personal income
2003
10960.8
336.8
280.0
1336.5
48.8
9632.3
759.3
778.6
9163.6
2004
11712.5
410.2
363.9
1436.2
66.7
10255.9
819.4
826.4
9731.4
2003
8429.7
5782.7
728.4
150.3
1387
1084
702.7
1235.7
7194
7025.6
168.5
2.3
2004
8429.7
5782.7
728.4
150.3
1387
1084
702.7
1235.7
7194
7025.6
168.5
2.3
Table 2.1. Personal Income and Its Disposition
[Billions of dollars]
Bureau of Economic Analysis
Downloaded on 11/10/2006 Last Revised on October 27, 2006
1
2
9
12
13
16
24
25
26
27
33
34
Personal income
Compensation of employees, received
Proprietors' income with inventory valuation and capital consumption adjustments
Rental income of persons with capital consumption adjustment
Personal income receipts on assets
Personal current transfer receipts
Less: Contributions for government social insurance
Less: Personal current taxes
Equals: Disposable personal income
Less: Personal outlays
Equals: Personal saving
Personal saving as a percentage of disposable personal income
Table 1.7.5. Relation of Gross Domestic Product, Gross National Product,
1. Prior to 1959, current surplus of government enterprises (line 22) is not
shown separately;subsidies are included net of the current surplus of
government enterprises in line 18.
2. Consists of compensation of employees, proprietors' income with inventory
valuationadjustment (IVA) and capital consumption adjustment (CCAdj), rental
income of persons withCCAdj, corporate profits with IVA and CCAdj, net interest
and miscellaneous payments, andconsumption of fixed capital.
3. Consists of gross national factor income less consumption of fixed capital.
Table 2.1. Personal Income and Its Disposition
1. Consists of aid to families with dependent children and, beginning with 1996,
assistance programs operatingunder the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996.
2. Consists of nonmortgage interest paid by households.
3. Equals disposable personal income deflated by the implicit price deflator
5 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Stratton
15. Explain the need for the adjustments to go from National Income to Personal Income
(Table 1.7.5 line 16 to line 26). Specifically, what is being subtracted and why? What is
being added and why? [Hint: just listing the items in the table is not sufficient. You must
explain the need for the process and demonstrate your understanding of the difference
between National and Personal Income.] – National income is the total earned factor
payments in the factor markets and includes all forms of compensation. Personal income
is the total receipts (income received) by households, whether the income is earned or
not. Therefore, we must subtract from national income any income that is earned, but not
received (Undistributed corporate profits, net taxes paid in production, contributions to
SS, business transfer payments, government surplus – similar to undistributed profits-,
etc.). We must add to national income any household receipts which were not earned
(primarily personal transfers).
16. Line 34 of Table 2.1 indicates that saving is about 2% of personal income. You can find
cross-country comparisons of national (and personal) saving rates at
http://www.oecd.org/dataoecd/5/48/2483858.xls . How does the U.S. compare? – In
general, for the last 10 years the U.S. savings rate has been one of the 2 or 3 lowest rates
of the countries covered in the table. (Between 18% and 13%)
Annex Table 24. Gross national saving
Per cent of nominal GDP
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
22.9
21.9
19.5
20.0
24.1
23.4
22.1
20.8
22.8
23.7
23.3
20.1
18.6
23.9
23.6
17.6
16.2
23.5
22.7
14.9
18.0
22.3
23.2
13.6
19.6
21.6
24.3
14.2
18.5
21.2
25.5
16.5
18.7
20.8
25.4
18.6
19.8
20.6
24.5
19.1
19.9
21.3
25.9
19.9
19.2
22.2
25.6
19.4
20.1
22.2
26.3
21.0
19.5
22.4
26.0
23.9
20.3
22.2
24.6
22.5
20.0
23.4
24.2
21.7
20.4
23.2
23.6
22.1
19.8
24.2
23.5
23.1
..
24.5
23.7
..
..
18.3
23.5
19.2
..
18.8
25.9
20.7
..
19.2
25.9
21.6
..
20.3
24.6
21.6
..
19.5
17.0
20.9
28.2
20.0
14.3
20.3
28.2
19.1
15.3
18.6
27.9
19.3
18.7
18.8
28.7
20.4
22.0
19.1
26.2
20.5
21.0
18.8
24.3
21.4
24.3
20.0
26.5
20.7
25.6
21.1
24.5
21.7
25.5
21.7
23.9
22.6
27.7
21.6
23.5
23.5
27.3
21.3
21.7
22.9
26.6
19.8
21.0
22.9
23.1
19.2
22.6
22.5
24.3
19.1
..
23.8
23.9
..
Germany
Greece
Iceland
Ireland
23.8
17.5
17.4
14.4
24.9
19.5
17.4
14.5
26.1
17.5
17.5
14.8
26.1
17.6
16.9
17.8
22.6
18.9
16.1
17.4
22.3
18.4
15.7
15.4
21.2
17.0
17.6
17.5
20.9
17.8
18.0
17.8
21.0
16.6
17.1
20.4
20.5
16.1
17.2
22.0
20.7
16.6
17.9
23.9
20.9
16.5
17.2
25.6
20.3
15.6
14.9
24.6
20.2
14.6
12.7
25.0
19.5
14.2
16.9
23.0
19.4
13.9
19.0
21.9
19.3
15.2
14.8
23.4
20.9
15.7
14.1
23.7
21.1
14.6
12.1
..
Italy
Japan
Korea
Mexico
21.8
32.3
38.4
24.5
21.8
33.5
40.6
21.3
21.1
33.6
37.7
20.3
20.8
33.8
37.7
20.3
20.0
34.5
37.7
18.7
19.1
33.7
36.9
16.6
19.7
32.3
36.8
15.1
19.9
30.4
36.3
14.8
22.0
29.5
36.2
19.3
22.2
29.8
35.3
22.4
22.2
30.2
35.4
24.0
21.6
29.3
37.2
20.5
21.1
28.1
35.0
20.6
20.6
27.9
33.6
20.6
20.9
26.6
31.6
18.0
20.8
25.7
31.2
18.6
19.8
26.4
32.6
19.2
20.3
..
34.8
21.0
19.8
..
32.8
..
Netherlands
New Zealand
Norway
Portugal
25.1
18.7
25.6
26.7
26.9
19.1
25.0
26.4
28.8
18.3
26.0
26.7
27.4
16.9
25.7
25.3
26.7
13.8
24.7
22.5
25.5
14.6
23.7
21.4
25.7
17.2
23.8
18.9
27.6
18.0
24.8
18.2
29.1
18.0
26.4
20.2
28.3
16.9
28.4
19.4
29.8
16.5
30.1
19.3
26.5
16.1
27.3
19.9
28.2
15.9
29.1
18.9
28.7
17.1
36.5
16.9
26.7
19.1
35.0
16.8
25.8
18.6
32.0
17.0
24.9
18.8
31.4
16.3
25.7
16.9
33.5
15.1
26.8
..
37.1
12.8
Spain
Sweden
Switzerland
Turkey
22.7
21.5
31.1
24.3
23.6
22.2
33.2
28.9
23.1
22.9
34.0
26.4
23.0
21.4
33.7
21.5
22.5
18.4
31.6
17.7
20.7
15.5
29.1
18.5
20.7
13.9
30.0
18.7
20.1
17.5
29.6
18.9
22.5
20.5
29.9
20.1
22.2
20.1
29.4
22.6
22.7
20.4
31.3
21.6
22.5
21.1
32.3
20.6
22.6
21.5
33.1
13.7
22.3
22.4
35.0
15.2
22.1
22.1
31.8
12.6
22.9
21.9
29.0
18.7
23.4
23.0
32.9
18.9
22.4
22.8
..
20.3
22.3
22.9
..
..
United Kingdom
United States
17.3
15.7
17.2
16.9
17.1
16.3
16.2
15.3
15.3
15.3
14.0
14.2
13.9
13.8
15.5
14.6
15.7
15.5
15.8
16.1
16.8
17.3
17.7
18.0
15.2
17.8
15.0
17.7
15.1
16.1
15.2
13.9
14.8
13.1
14.8
13.0
14.2
..
Note: Based on SNA93 or ESA95 except Turkey that reports on SNA68 basis.
Source: National accounts of OECD countries database.
6 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Stratton
Scenario 3:
The table below was complied using data from the BEA website. Use these data to answer the
associated questions. Be sure to answer the questions as completely as you can. If calculations are
requested, show your work!
Table 1.1.6. Real Gross Domestic Product, Chained Dollars
[Billions of chained (2000) dollars]
Bureau of Economic Analysis
Downloaded on 9/28/2005 At 9:26:45 AM Last Revised August 31, 2005
Line
1 Gross domestic product
2 Personal consumption expenditures
% of GDP
6 Gross private domestic investment
% of GDP
13 Net exports of goods and services
% of GDP
14 Exports
% of GDP
17 Imports
% of GDP
20 Government consumption expenditures and gross investment
% of GDP
25 Residual
1960
2501.8
1597.4
64%
266.6
11%
-12.7
-1%
90.6
4%
103.3
4%
715.4
29%
-64.9
1970
3771.9
2451.9
65%
427.1
11%
-52
-1%
161.4
4%
213.4
6%
1012.9
27%
-68
1980
5161.7
3374.1
65%
645.3
13%
12.6
0%
323.5
6%
310.9
6%
1115.4
22%
14.3
1990
7112.5
4770.3
67%
895.1
13%
-54.7
-1%
552.5
8%
607.1
9%
1530
22%
-91.1
2000
9817
6739.4
69%
1735.5
18%
-379.5
-4%
1096.3
11%
1475.8
15%
1721.6
18%
0.2
2004
10755.7
7588.6
71%
1809.8
17%
-601.3
-6%
1117.9
10%
1719.2
16%
1952.3
18%
-5.1
Note. Chained (2000) dollar series are calculated as the product of the
chain-type quantityindex and the 2000 current-dollar value of the corresponding
series, divided by 100. Becausethe formula for the chain-type quantity indexes
uses weights of more than one period, thecorresponding chained-dollar estimates
are usually not additive. The residual line is thedifference between the first
17. What insight do these data provide on the growth of government spending in the U.S.?
Explain. – Government spending represents a declining percentage of real GDP. Thus in
real terms, government spending is declining relative to other sectors, particularly
consumption and investment.
18. What insight do these data provide on the source of our growing balance of trade deficit?
Explain. – Our imports are growing faster than our exports causing the deficit to grow.
This might be the result of our increased taste for foreign goods, or restrictions imposed
by other countries on our exports.
Scenario 4: The diagram below provides a picture of the U.S. labor market. It depicts the flows
of individuals between the 3 categories of labor market participation (Employed, Unemployed
and Not in the Labor Force).
7 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Stratton
1
1.1
1.2
2.1
2.2
2
19. Holding other things the same, explain what impact an increase in the number of job
losers and leavers (flow 2.1) has on the unemployment rate.
UE rate would increase. UE rate = UE/LF; An increase in Flow #2.1 increases UE, but
the LF remains constant. Therefore, the ratio UE/LF will be larger, since LF is constant
and UE is larger.
20. An increase in the number of discouraged workers will tend to increase which flow?
Why?
Discouraged workers are those who have been looking for work and would accept work
if offered, but who have stopped looking for work. They would be represented in flow
2.2.
8 of 9
6/24/2017
146998289
Foundations of Economic Analysis
Stratton
Scenario 5: The table below was complied using data from the BLS website. Use these data to
answer the associated questions. Be sure to answer the questions as completely as you can. If
calculations are requested, show your work!
Nominal Gross domestic product
Real Gross domestic product
Claculated GDP Deflator
2000
9817.0
9817.0
100.0
2001
10128.0
9890.7
102.4
2002
10469.6
10048.8
104.2
2003
10971.2
10320.6
106.3
2004
11734.3
10755.7
109.1
CPI - All items
Claculated Real GDP
Core CPI - without food and enegy
Claculated Real GDP
172.2
5700.9
181.3
5414.8
177.1
5718.8
186.1
5442.2
179.9
5819.7
190.5
5495.9
184.0
5962.6
193.2
5678.7
188.9
6211.9
196.6
5968.6
Claculated Inflation rate
2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004
Claculated GDP Deflator
2.4%
1.7%
2.0%
2.6%
CPI - All items
2.8%
1.6%
2.3%
2.7%
Core CPI - without food and enegy
2.6%
2.4%
1.4%
1.8%
Claculated Growth Rate of Real GDP
Reported Real GDP
Estimated using CPI - All items
Estimated using Core CPI
0.8%
0.3%
0.5%
1.6%
1.8%
1.0%
2.7%
2.5%
3.3%
4.2%
4.2%
5.1%
CPI - All items: Series CUUR0000SA0; Not Seasonally Adjusted; Base Period: 1982-84=100
Core CPI - without food and enegy: Series CUUR0000SA0L1E; Not Seasonally Adjusted; Base Period: 1982-84=100
Source: http://data.bls.gov/cgi-bin/surveymost?cu
21. How is the GDP Deflator calculated from the data given? Calculate the GDP Deflator for
the five years. – The GDP deflator can be calculated by Nominal GDP / Real GDP. The
calculations are in the table.
22. Explain how to calculate the annual inflation rate. – An annual inflation rate is calculated
by taking the absolute difference in the price index divided by the price index in the first
year. (Index2 – Index1)/Index1
23. Calculate the annual inflation rate using the CPI – All items. – Answers in table.
24. How can the Real GDP be estimated using CPI? – Real GDP can be calculated using CPI
by the formula: (Nominal GDP) / (CPI/100).
Calculate Real GDP using the Core CPI. – The estimations are in the table.
25. Explain how to calculate the annual rate of growth in Real GDP. – An annual rate of
growth is calculated by taking the absolute difference in the real GDP divided by the real
GDP in the first year. (GDP2 – GDP1)/GDP1
9 of 9
6/24/2017