Question.3118 - 3. Consider a nation in which the volume of goods and services is growing by 5 percent per year. What is the likely impact of this high rate of growth on the power and influence of its government relative to other countries experiencing slower rates of growth? What about the effect of this 5 percent growth on the nation’s living standards? Will these also necessarily grow by 5 percent per year, given population growth? Why or why not? 5. Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other financial institutions play in aiding the growth process? 8. Catalog companies are committed to selling at the prices printed in their catalogs. If a catalog company finds its inventory of sweaters rising, what does that tell you about the demand for sweaters? Was it unexpectedly high, unexpectedly low, or as expected? If the company could change the price of sweaters, would it raise the price, lower the price, or keep the price the same? Given that the company cannot change the price of sweaters, consider the number of sweaters it orders each month from the company that makes its sweaters. If inventories become very high, will the catalog company increase, decrease, or keep orders the same? Given what the catalog company does with its orders, what is likely to happen to employment and output at the sweater manufacturer? Problems 3. A mathematical approximation called the rule of 70 tells us that the number of years that it will take something that is growing to double in size is approximately equal to the number 70 divided by its percentage rate of growth. Thus, if Mexico’s real GDP per person is growing at 7 percent per year, it will take about 10 years (= 70/7) to double. Apply the rule of 70 to solve the following problem. Real GDP per person in Mexico in 2005 was about $11,000 per person, while it was about $44,000 per person in the United States. If real GDP per person in Mexico grows at the rate of 5 percent per year, about how long will it take Mexico’s real GDP per person to reach the level that the United States was at in 2005? (Hint: How many times would Mexico’s 2005 real GDP per person have to double to reach the United States’ 2005 real GDP per person?) Ch 24, Pg 502 – Questions 4. Why do economists include only final goods and services in measuring GDP for a particular year? Why don’t they include the value of the stocks and bonds bought and sold? Why don’t they include the value of the used furniture bought and sold? 5. Explain why an economy’s output, in essence, is also its income. 12. Which of the following are included or excluded in this year’s GDP? Explain your answer in each case. a. Interest received on an AT&T corporate bond. b. Social Security payments received by a retired factory worker. c. Unpaid services of a family member in painting the family home. d. Income of a dentist from the dental services provided. e. A monthly allowance a college student receives from home. f. Money received by Josh when he resells his nearly brand-new Honda automobile to Kim. g. The publication and sale of a new college textbook. h. An increase in leisure resulting from a 2-hour decrease in the length of the workweek, with no reduction in pay. i. A $2 billion increase in business inventories. j. The purchase of 100 shares of Google common stock. Problems 4. (expenditures GDP only) To the right is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The results you obtain with the different methods should be the same. Personal consumption expenditures $245 Net foreign factor income 4 Transfer payments 12 Rents 14 Statistical discrepancy 8 Consumption of fixed capital (depreciation) 27 Social Security contributions 20 Interest 13 Proprietors’ income 33 Net exports 11 Dividends 16 Compensation of employees 223 Taxes on production and imports 18 Undistributed corporate profits 21 Personal taxes 26 Corporate income taxes 19 Corporate profits 56 Government purchases 72 Net private domestic investment 33 Personal saving 20 a. Using the above data, determine GDP by both the expenditures and the income approaches. 5a. Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions. Compensation of employees $194.2 U.S. exports of goods and services 17.8 Consumption of fixed capital 11.8 Government purchases 59.4 Taxes on production & Imports 14.4 Net private domestic investment 52.1 Transfer payments 13.9 U.S. Imports of goods & services 16.5 Personal taxes 40.5 Net foreign factor income 2.2 Personal consumption expenditures 219.1 Statistical discrepancy 0 6. Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005 the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine the GDP price index for 1984, using 2005 as the base year. By what percentage did the price level, as measured by this index, rise between 1984 and 2005? What were the amounts of real GDP in 1984 and 2005? 7. The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data.
Answer Below:
Ans 1) If a country’s economic size is growing more quickly when compared to the rest of the world would result in the country’s increasing power and influence in the international sector. The simple reason being increasing money compared to other countries will yield more economic and political influence. China can be cited as an example of such a country from the last decade. The country managed to grow at a quicker rate and hence the power yielded also increased There exists a positive correlation between higher income and higher standard of living. But it cannot be determined or said that if GDP increases by 5%, that the standard of living also increases by 5%. GDP = C (consumption) + I (investment) + G (government spending) + NX (net exports) Keeping in mind the above equation, the GDP could increase because of increase in any of the above components on the right hand side of the equation. For example, if government spending increases by 5%, but the standards of living in the country might not increase with only government spending. Similarly the exports could have risen by 5% (if, the currency of the country is devalued) which would raise NX by 5%, leaving standards of living relatively unchanged. Thus even if GDP increases by 5% it cannot be proved that the standard of living has also increase by 5%. The standard of living is very difficult to be determined directly and it depends on which indicators we choose to measure the standard of living for a country. Consumption is the main factor which decides the standard of living. But again standard of living depends on a lot of factors, few of which may be qualitative and thus difficult to determine. But a conclusion can be made that a country experiencing a positive growth in GDP will also have an increase in the standard of living. Ans 2) The limitation in terms of availability of resources, money and materials has resulted in a tradeoff between the present and future consumption. The consumption that we enjoy today is a result of the investments made by us in the past and similarly to continuously keep enjoying the consumption in future, we have to maintain a balance between today’s consumption and Investment. We cannot have two ways in our lives. Thus if we choose to enjoy more of consumption today we will have to sacrifice the standard of living today. The reason being, with higher consumption, the amount of investment will be less as we have finite resources. Conversely, if we chose to sacrifice consumption today, will result in higher standard of living tomorrow and thus we cannot enjoy more of both. We have to make choices amongst these to keeping in mind our present and future needs. Investments are directly proportional to savings. Any individual, who saves by sacrificing consumption, does not leave the savings idle but invest the same in order get returns in future. Thus investment is directly proportional to savings. As savings go up, investment will also increase. If consumption decreases, investments will increase. This increase will result in investing in new businesses and results in more efficient means of production. Banks and other financial instruments play a very important role in aiding the growth process. They encourage savings from the households by offering more returns and investing the same in businesses. These households are looking for returns on savings, but also do not want to take risks. At the same point there are people who want to run business, but face difficulties because of shortage of capital. Thus bank and other financial institutions play a vital role. They act as avenues where household can park their savings and provide loans to people who need loans. Ans 3) If the company observes that the inventory for sweaters is increasing, this implies that the demand for sweaters is falling. There can be several reasons behind the same. The prime reason behind demand of any product is the price and use of the product. Thus if the consumer feels that the product is priced high as compared to the utility he will derive from the product, he may not buy the product. The same case may be with the sweaters, because of high price, people may not buy them. Thus in order to increase the demand the company should reduce the price of the sweater. If the catalogue company cannot change the price and the inventory is high, it will reduce the order size to the manufacturer. Thus if the order for the manufacturing comes down, the manufacturing unit will cut down the production and thus need lesser employees and other factors of production. As a result of which the employment will come down for the sweater manufacturer. Ans 4) Applying the rule of 70, given that the growth rate of Mexico is 5%, we know that the GDP doubles in (70/5) or 14 years. Thus from the current GDP of 11000 USD per person, after 14 years it will become 22000 USD. Now from 22000 USD again it will double in 14 years and reach 44000 USD. Thus if Mexico wants to achieve the GDP of US in 2005, it will take 28 years if it continues to grow at 5%. Ans 5) The dollar value of intermediate goods is included in the dollar value of final product. If intermediate goods are included in the GDP measurement, then the error of multiple counting will crop up. Thus the value of steel which is an intermediate good in the production of automobiles (final product) is not included in the price of Automobile. The purchase of sale of stocks and bonds is not included in GDP Measurement. The reason behind the same being that such transactions only record the transfer of ownership of existing assets, and there is not fresh value addition in terms of investment. Used furniture was manufactured in the previous years and has already been accounted for GDP measurement in the year in which it was manufactured. Thus if again the purchase or sale of used furniture is used for GDP Measurement, it would result in multiple error and thus wont present a true picture. Ans 6) Everything that is being produced will be sold. Output= Selling Price*Quantity sold i.e Revenue Revenue is split into Profits- Income of Shareholders Interest-income of people who provide loan Salary- income of employees who work Materials & Equipment- In order to manufacture the output company buys Raw materials/Plant and Machinery Thus the profit, interest and salary are income for the people who are earning it. Also the people who supply materials and equipments, the part of revenue being given to them is revenue for them and would be distributed amongst the stakeholders. This hierarchy may go down till the land owners, for the land owners who get rent for the land they own. Thus the output of one company may be income for someone and thus it is treated as income. Ans 7) I. Interest on AT&T bond would be included in the GDP measurement for the person who is receiving the interest, but not in GDP calculation by value added of AT&T because interest is expenditure for AT&T. II. The Social Security payments received by a retired person will be a part of GDP calculation under income aggregation method as it is a transfer payment and not output is created. III. The same will not be included in GDP calculation as not output or income has been derived by the same. IV. The income of a dentist from the dental services provided will be included in GDP Calculation. V. The monthly allowance is not a income or value addition for the college going student and the same has already been accounted for, in the parents income thus this allowance should not be included in GDP Calculation. VI. Money received by Josh by selling the brand new Honda automobile to Kim should not be included in GDP calculation as the same has been done when the automobile was manufactured. VII. The publication and sale of new college text books should be included in GDP calculation. VIII. Since there is no reduction in pay, hence the increase of leisure will not result in any changes in GDP calculation. IX. A $ 2 billion increase in inventory will be included in GDP Calculation as the output has been manufactured to increase the inventory. X. The purchase of 100 shares of Google common stock will not be included in GDP calculation as no fresh shares are being issued. There is only transfer of ownership happening. Ans7) a. The expenditures approach: GDP = [$245 (Personal consumption expenditures)] + [$33 (Net private domestic investment) + $27 (Consumption of fixed capital, depreciation) (the sum of these two components measures gross investment = $60)] + [$72 (Government purchases)] + [$11 (net exports)] = $245 + $60 + $72 + $11 = $388. The income approach: GDP = $223 (compensation of employees) + $14 (Rents) + $13 (Interest) + $33 (Proprietor's income) + $56 (Corporate profits) + $18 (Taxes on production and imports) + $27 (Consumption of fixed capital, depreciation) - $4 (Net foreign factor income) + $8 (Statistical discrepancy) = $223 + $14 + $13 + $33 + $56 + $18 + $27 -$4 + $8 = $388 Both methods will give us the same answer. Ans8) a) Using the expenditures approach, GDP = $219.1 (Personal consumption expenditures) + $52.1 (Net private domestic investment) + $11.8 (Consumption of fixed capital) + $59.4 (Government purchases) + $17.8 (U.S. exports of goods and services) - $16.5 (U.S. Imports of goods and services) = $343.7 b) Net Domestic Product = $343.7 (GDP) - $11.8 (Consumption of fixed capital) = $331.9 c) National Income = $331.9 (Net Domestic Product) + $2.2 (Net foreign factor income) - $0 (Statistical discrepancy) = $334.1 Ans 9) The simple approach, given that we only have one good in the economy, is to take the price in 1984, divide by the price in 2005, and multiply by 100. This gives us ($10/$16) x 100 = 62.5. A version that extends to multiple goods is as follows: First, multiply the buckets of chicken in 2005 by the price of a bucket of chicken in 2005, which gives is the value $352,000 = $16 x 22,000. (We would do this for all goods and add up each value.) Second, multiply the buckets of chicken in 2005 by the price of a bucket of chicken in 1984, which gives us $220,000 = $10 x 22,000. (We would do this for all goods and add up each value. Be sure to use the 2005 quantities and the 1984 prices). This process fixes quantity in the base year and varies prices (CPI). Finally, divide the value of the buckets of chicken using 1984 prices by the value of the bucket of chicken using 2005 prices (the base year). This gives us a GDP price index for 1984 = ($220,000/$352,000) x 100 = (($10 x 22,000) / ($16 x 22,000)) x 100 = ($10/$16) x 100 = 62.5 In both cases, the price level increased by 60% = ((100 - 62.5)/62.5) = ((16-10)/10) x 100 Real GDP in 1984 and 2005, where 2005 is the base, can be found by dividing nominal GDP by the year’s price index (remember to convert the price index back into decimal form.) Nominal GDP in 2005 is $352,000 = $16 (price 2005) x 22,000 (output 2005). The price index for 2005 is 100 (by definition, base year). Thus, Real GDP = $352,000 (nominal output 2005) / (100/100) (The price index 2005 scaled to decimal form) = $352,000/1 = $352,000 Nominal GDP in 1984 is $70,000 = $10 (price 1984) x 7,000 (output 1984). The price index for 1984 is 62.5 (found above). Thus, Real GDP = $70,000 (nominal output 1984) / (62.5/100) (The price index 1984 scaled to decimal form) = $70,000/0.625 = $112,000 Ans 10) Real GDP can be found by dividing nominal GDP by the price index (decimal form) for that year. If the price index is below 100 you inflating GDP and if the price level is above 100 you are deflating GDP Real GDP 1968 = $909.8/ (22.01/100) = $4133.58 (inflating) Real GDP 1978 = $2293.8/ (40.40/100) = $5677.72 (inflating) Real GDP 1988 = $5100.4/ (66.98/100) = $7614.81 (inflating) Real GDP 1998 = $8793.5/ (85.51/100) = $10,283.59 (inflating) Real GDP 2008 = $14,441.4/ (108.48/100) = $13,312.50 (deflating)More Articles From Economics
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