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TEHNICAL
Q1. In the text, we calculated the change in real GDP in the hypothetical
economy of Table 2-3, using the prices of 2005. Calculate the change in real
GDP between 2005 and 2010 using the same data but the prices of 2010.
Your answer should demonstrate that the prices that are used to calculate
real GDP do affect the calculated growth rate, but typically not by very much.
Answer:
2005 NOMINAL GDP 2010 NOMINAL GDP 2010 REAL GDP
Beer 1 at $1.00 $1.00 2 at $2.00 $4.00 2 at $1.00 $2.00
Skittles 1 at $0.50 0.50 3 at $0.75 $ 2.25 3 at $0.50 1.50
$1.50 $6.25 $3.50
As given above in the table the real GDP is measured on the basis of the
prices of 2005. If the basis price is to be considered on 2010 price, then the
real GDP and nominal GDP will be the same so 2005 GDP will be on base on
price of 2010. So Beer will be on the price of $2.00 and Skittles will at $0.75,
Therefore the nominal GDP of 2005 on basis of 2010 is ($2.00 + $0.75) that is
$2.75. The real GDP of 2005 is $6.25 - $2.75 = $3.50.
Q3. The following is information from the national income accounts for a
hypothetical country:
GDP $6,000 Gross investment 800 Net investment 200 Consumption 4,000
Government purchases of goods and services 1,100 Government budget
surplus 30
What is a. NDP? d. Disposable personal income? b. Net exports? e.
Personal saving? c. Government taxes minus transfers?
Answer:
National income can be calculated by adding up all public and private
expenditures made on final goods and services during a year. It is obtained
by:
- Personal consumption expenditure of goods and services.
- Gross domestic private investment.
- Government purchase of goods and services.
- Net Foreign investment.
So we can measure national income using the following equation:
GDP = C + I + G + NE
So, we can find Net Exports as
NE = GDP - C - I - G
NE = 6000 - 4000 - 800-1100 = 100
NDP can be calculated:
NDP = GDP- Depreciation
Depreciation = Gross investment - Net investment = 800-200 = 600 NDP =
6000-600 = 5400 The next step is to calculate the government taxes minus
transfers Government budget surplus = Government taxes minus transfers -
Government purchase of goods and services
30 = Government taxes minus transfers -1100 Government taxes minus
transfers = 30+1100 = 1130 Disposable personal income can be calculated:
Disposable Personal Income = National Income + Government Transfers to
Individuals − Personal Tax - Depreciation= National Income -(Personal
Tax - Government Transfers to Individuals) - Depreciation = 6000 -1130 - 600
= 4270 The next step is to calculate Personal saving:
Personal saving = Disposable Personal Income - Consumption = 270 .
Q4. Assume that GDP is $6,000, personal disposable income is $5,100, and
the government budget deficit is $200. Consumption is $3,800, and the trade
deficit is $100.
a. How large is saving (S)?
b. How large is investment (I)?
c. How large is government spending (G)?
Answer:
Y = Rs. 6000, Yd = Rs. 5100, BD = 200, C = Rs. 3800, NX = -1000.
Saving S = Yd - C = 5100 - 3800 = Rs. 1300,
Y = C + I + G + NX,
Government spending G = T + BD, T = Y - Yd = 6000 - 5100 = 900, so G = 900 +
200 = Rs. 1100.
Investment I = Y - C - G - NX = 6000 - 3800 - 1100 + 1000 = Rs. 2100.
Q5. If a country’s labour is paid a total of $6 billion, its capital is paid a total
of $2 billion, and profits are zero, what is the level of output? (Hint: See
equation 2.)
Answer:
Output=$8billion
This is because Output=cost of labour +cost of capital +profits. Hence since
cost of labour and capital is $8billion collectively (cost of labour=$6billion
and cost of capital=$2billion) and profits is nil therefore we can conclude that
the output of the economy is $8billion
Q6. Consider an economy that consists only of those who bake bread and
those who produce its ingredients. Suppose that this economy’s production
is as follows: 1 million loaves of bread (sold at $2 each); 1.2 million pounds of
flour (sold at $1 per pound); and 100,000 pounds each of yeast, sugar, and
salt (all sold at $1 per pound). The flour, yeast, sugar, and salt are sold only to
bakers, who use them exclusively for the purpose of making bread. a. What
is the value of output in this economy (i.e., nominal GDP)?
Answer:
Here, the output of the economy is $1 million multiplied by the value of each
bread sold that is $2 so, total output is $2 million.
Now,the flour, yeast, sugar, and salt are sold solely to bakers, here it now
becomes Intermediary Consumption (IC).
Therefore, the value of output in this economy is $2 million – ($1.2 million +
$0.3 million) = $0.5 million.
Q7.Suppose a country’s CPI increased from 2.1 to 2.3 in the course of 1 year.
Use this fact to compute the rate of inflation for that year. Why might the CPI
overstate the rate of inflation?
Answer:
Initial CPI = 2.1
Final CPI = 2.3
Rate of inflation = (final – initial divided by initial)*100
= 9.52%
CPI might overstate inflation because consumer buys the less good on which
price has increased.
Q8. Suppose you buy a $100 government bond that is due next year. How
much nominal interest will you receive if inflation is 4 percent over the year
and the bond promises a real return of 3 percent?
Answer:
As nominal rate includes the inflation and real return adjusts the inflation so,
Nominal interest is inflation plus real return that is 7 percent.
Therefore, interest received on $100 bond is $100*7% = $7