Solution to HW1 E322 PDF

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Bulent Guler - Solution HW1...

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ECON 322: Intermediate Macroeconomics, Spring 2017 Solution to Assignment 1 1) Firm A: Total Revenue

10 million pounds * 1 dollar/pound = $ 10million

Wages Taxes

$6 million $1 million

Firm B: Total Revenue

5 million boxes * 3 dollars/box = $15 million

Inventory Cost of Orange

1 million box * 3 dollars/box = $3 million 4 million boxes * 1 dollar/pound = $4 million

Wages Taxes

$5 million $2 million

Import

2 million boxes * 2 dollars/box = $4 million

After-Tax Profits: Firm A Firm B

$10 million – $6 million – $1 million = $3 million (Total Revenue) (Wages) (Taxes) $15 million + $3 million - $4 million - $5 million - $2 million -$4 million = $3 million (Total Revenue) (Inventory) (Cost of Orange) (Wages) (Taxes)

Government: Tax Revenue

$1 million + $2 million = $3 million (Firm A)

Wages

(Import Cost)

(Firm B)

$4 million (Educational Services)

Consumers: Consumption

$3 million + $15 million = $18 million

Wage Income

$6 million + $5 million = $11 million

a) Product Approach Value added – Firm A Value added – Firm B

$10 million $15 million + $3 million -$4 million - $4 million = $10 million (Inventory) (Cost of Orange) (Import Cost)

Value added – government

$4 million (Wages)

GDP = $10 million + $10 million + $4 million = $24 million b) Expenditure Approach Consumption

$21 million

Investment

$3 million

(Inventory) Government Expenditure $4 million Net Export

$3 million - $4 million = $-1 million (Export) (Import)

GDP = C + I + G + NX = $18 million + $3 million + $4 million + $-1 million = $24 million c) Income Approach Wage Income $6 million + $5 million + $4 million = $15 million (from Firm A)

(from Firm B)

(from Government)

After-Tax Profits $3 million + $3 million = $6 million Taxes $3 million GDP = $15 million + $6 million + $3 million = $24 million

2) a) Nominal GDP in Year 1: Nominal GDP in Year 2:

NGDP1 = $500 * 10 + $50 * 100 = $10,000

NGDP2 = $600 * 20 + $80 * 120 = $21,600

Rate of growth of nominal GDP =

（

21,600 NGDP2 －1）100 * %= （ -1）100 * %= 116% NGDP1 10,000

b) Using base year as Year 1 Real GDP in Year 1: RGDP1 = NGDP1 = $10,000 Real GDP in Year 2: RGDP2 =$500 * 20 + $50 * 120 = $16,000 Rate of growth for real GDP =

(

16,000 RGDP2 − 1) *100% = ( − 1) *100% = 60% RGDP1 10,000

Chain-weighting method: Using Year 1 as base year (as calculated above) 1 Real GDP in Year 1: RGDP1 = $10,000 1 Real GDP in Year 2: RGDP2 = $16,000

g1 =

RGDP1 2 16,000 = = 1.6 RGDP11 10,000

Using Year 2 as base year Real GDP in Year 1: RGDP12 = $600 * 10 +$80 * 100 = $14,000

2 Real GDP in Year 2: RGDP2 = NGDP2 = $21,600

2

g2 =

RGDP 2 21,600 = ≈ 1.5429 RGDP1 2 14,000

Fisher Index

g c = g1 * g2 ≈ 1.6*1.5429 ≈ 1.5712 Rate of growth for real GDP using chain-weighting method=

( gc − 1)*100% = (1.5712 − 1)*100% = 57.12%

c)

Implicit GDP Price deflator =

Nominal GDP *100 RealGDP

Using Year 1 as base year Implicit GDP Price deflator in Year 1 = 100 Implicit GDP Price deflator in Year 2 =

Inflation =

21,600 *100 = 135 16,000

135 − 100 *100 = 35 100

Using Year 2 as base year Implicit GDP Price deflator in Year 1 =

10,000 *100 ≈ 71.43 14,000

Implicit GDP Price deflator in Year 2 = 100 Inflation =

100 − 71.43 *100 ≈ 40 71.43

Chain-weighting method Choose chain-weighted real GDP to be in year 1 dollars. Real GDP in Year 1: RGDP1c = 10,000 Real GDP in Year 2: RGDP2c = RGDP1c * g c =10,000 * 1.5712 = 15,712 Implicit GDP Price deflator in Year 1 =

10,000 *100=100 10,000

Implicit GDP Price deflator in Year 2 =

21,600 *100 ≈ 137.47 15,712

Inflation =

137.47 − 100 *100=37.47 100

(Only Chain-weighting method is required in this problem.) d) If computers in year 2 are of higher quality compared to computers in year 1, computers produced in year 2 can do more work than computers produced in year 1. Assume the 20 computers produced in year 2 can do the same amount of work as 40 computers produced in year 1, then the quantity of computers produced in year 2 in terms of computers produced in year 1 is 40. However, although we treat the 20 computers in year 2 as 40 computers, in reality, we only have 20 computers sold at the same price as in year 1. So those 40 imagined computers’ price is half of the market price ( year 1 price), that is $300. Then the problem becomes as follows: price

quantity

$500

10

Year 1

computers bicycles

$50

100

Year 2

computers

$300

40

bicycles

$80

120

Nominal GDP and its rate of growth do not change. Using Year 1 as base year, real GDP in year 1 does not change, while real GDP in Year 2 is larger since we have more computers in Year 2 now. So rate of growth for real GDP is larger than that calculated in (b). 1

In chain-weighting method,

g1 =

RGDP 2 , RGDP 12 becomes larger while RGDP11

1 RGDP1 remains the same, so g1 is larger. g2 =

RGDP2 2 2 , RGDP 1 becomes 2 RGDP1

smaller while RGDP22 remains the same, so g2 is also larger. Thus, g c =

g1 * g2

becomes larger. Rate of growth for real GDP using chain-weighting method is larger than that calculated in (b) As RGDP2c = RGDP1c * g c becomes larger, and nominal GDP does not change, chain-weighting Implicit GDP Price deflator in Year 2 becomes smaller and the inflation becomes smaller. From the above calculation, we can find that when we adjust for quality change to compute the inflation (measured by GDP deflator) in this problem, we get a smaller inflation than we calculated in problem c), that is, we get a downward bias in our calculation of inflation. This is consistent with the statement that Paasche Indices (GDP Deflator) understates price increases. 3) a) Total private investment: I = Y – C – G - NX

= $15 trillion - $10 trillion - $3 trillion – ($3 trillion - $4 trillion) = $3 trillion b) GNP = GDP + NFP = $15 trillion + $0.2 trillion = $15.2 trillion c) Total national saving: S = I + CA = $3 trillion + $-0.8 trillion = $2.2 trillion d) Current Account Surplus: CA = NX + NFP = (EX – IM) + NFP = ($3 trillion - $4 trillion) + $0.2 trillion = $-0.8 trillion...