Intro to Econ - Assignment 2 PDF

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Intro to Econ: Assignment 2

1. What components of GDP (if any) would each of the following transactions affect? Explain. a. A family buys a new refrigerator. b. Aunt Jamila buys a new house. c. Ford sells a Mustang from its inventory. d. You buy a pizza. e. Haryana repaves Eastern Peripheral Expressway. f. Your parents buy a bottle of French wine. g. Honda expands its factory in Marysville, Ohio.

2. The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded. 3. Consider the following data from the country of milk and honey:

Year 2010 2011 2012

Price of Milk ($) 1 1 2

Quantity of Milk (quarts) 100 200 200

Price of Honey ($) 2 2 4

Quantity of Honey (quarts) 50 100 100

a. Compute nominal GDP, real GDP and GDP deflator for each year, using 2010 as the base year. b. Calculate the percentage change in nominal GDP, real GDP and GDP deflator in 2011 and 2012 from the preceding year. 4. A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which he sells to a baker for $150. The baker turns the wheat into bread, which he sells to consumers for $180. Consumers eat the bread. Assuming that there are no other intermediate products, calculate the value added by each of the producers and henceforth the economy’s GDP through the value-added method.

5. Consider the table below. Fill in the missing cells. What is the contribution of a carton of orange juice to GDP?(4 points) Activity Growing Oranges Making juice Distributing to juice to stores Selling to juice to consumers Total

Cost of Input ($) 0 1 1.50

Price of Output ($) 1 1.50 2.25

2.25

3.50

Value Added ($)

6. If the labour market participation of women rises, how do you think that is going to affect GDP? 7. Why would it be desirable for a country to have a large GDP? Give an example of something that might raise GDP and yet be undesirable.

8. Many years ago, you paid Rs. 5,000 to procure a music collection. Today, you sold it for Rs. 500 at your garage sale. How does this sale affect current GDP?

9. One day, Barry the Barber, Inc., collects $400 for haircuts. Over this day, his equipment depreciates in value by $50. Of the remaining $350, Barry sends $30 to the government in sales taxes, takes home $220 in wages, and retains $100 in his business to add new equipment in the future. From the $220 that Barry takes home, he pays $70 in income taxes. Based on this information, compute Barry’s contribution to the following measures of income: a. Gross domestic product b. Net national product c. National income d. Personal income e. Disposable personal income Note: Consult the picture clip for assistance with the computations.

10. “Inflation is bad for the economy because goods and services are more expensive” – is this statement true/false/uncertain? Provide your reason briefly.

11. a. Consider an economy with the population size of 10,000. The size of the labour force is 8,000 while the number of people employed is 7,000. Calculate the unemployment rate of this economy.

b. The nominal GDP growth of a country in a year is 8%, while the real GDP growth is 4%. Calculate the rate of inflation for this economy. 12. Suppose University Uni is a small country. The only good/service that Uni produces is undergrad education. a. Complete the following table: Year 1950 2000 2001 2002 2003 2004

Number of undergrads 300 900 1,000 1,100 1,000 1,200

Price (tuition Rs.) 2,000 20,000 21,000 23,000 25,000 28,000

Nominal GDP

Real GDP (1950 Rs.)

Real GDP (2000 Rs.)

b. Calculate the growth rate of nominal GDP for 2002, 2003 and 2004. (Note: the growth rate of X t =( X t −X t −1) / X t −1 and then multiplied by 100 to express it as a percentage. c. Calculate the growth rate of real GDP (using 2000 Rs.) for 2002, 2003 and 2004. d. Calculate the growth rate of real GDP (using 1950 Rs.) for 2002, 2003 and 2004. e. Why are the answers to c. and d. same/different?

f.

Compute the inflation rate using GDP deflator (using 2000 Rs.) for 2002, 2003 and 2004. (Hint: figure out the price level in the economy using the relationship between nominal GDP, real GDP and the GDP deflator and then use the definition of inflation as the growth rate of price to calculate the inflation rate)....