ECO 1002 IN CLASS QUESTIONS

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1 Dokuz Eylül University Faculty of Business Department of Economics Spring 2018 Question 1. ECO 1002 IN CLASS QUESTIONS Which of the following transactions or activities would be counted in your country s GDP? Explain your answers. a. A transportation company acquires a fleet of second-hand vehicles. b. The same transportation company acquires gallons of gas from a foreign company deducted from the net export component of GDP. c. You buy 10 short-term government bonds. d. A mining company acquires new government licenses to drill in land the company already owns. e. You pay for a new haircut at your local hairdresser. f. Foreign residents buy a bundle of your country s food specialties on an online retail site. g. Your parents spend a whole day cooking meals to be handed out to their poorer neighbors. h. The local government acquires furniture for newly built schools. i. Two telecommunications companies merge. j. A non-profit organization buys an apartment to lodge their headquarters. k. You receive a large sum of money as bequest from a dead relative. (a) Not counted used goods. (b) Not counted imports. (c) Not counted financial transaction. (d) Not counted financial transaction. (e) Counted final consumption of a service. (f) Counted exports are final consumption by foreign residents. (g) Not counted nonmarket goods. (h) Counted government investment. (i) Not counted financial transaction. (j) Counted investment spending (k) Not counted financial transfer. NOTES: GDP = C + I + G + (EX - IM) Components of GDP (Expenditure Approach) Personal consumption expenditures (C) Durable goods Nondurable goods 1

2 Services Gross private domestic investment (I) Nonresidential Residential Change in business inventories Government consumption and gross investment (G) Net exports (EX - IM) Exports (EX) Imports (IM) =====Gross domestic product Income Approach National Income==== Compensation of employees Proprietors income Rental income Corporate profits Net interest Indirect taxes minus subsidies Net business transfer payments Surplus of government enterprises GDP, GNP, NNP, and National Income GDP Plus: Receipts of factor income from the rest of the world Less: Payments of factor income to the rest of the world Equals: GNP Less: Depreciation Equals: Net national product (NNP) Less: Statistical discrepancy Equals: National income National Income, Personal Income, Disposable Personal Income, and Personal Saving National income Less: Amount of national income not going to households (SUCH AS: the profits of corporations not paid to households in the form of dividends, called the retained earnings of corporations) Equals: Personal income Less: Personal income taxes Equals: Disposable personal income Less: Personal consumption expenditures Personal interest payments Transfer payments made by households Equals: Personal saving 2

3 Question 2. In a simple economy, suppose that all income is either compensation of employees or profits. Suppose also that there are no indirect taxes. Calculate gross domestic product from the following set of numbers. Show that the expenditure approach and the income approach add up to the same figure. Consumption $9500 Investment $3000 Depreciation $1750 Profits $2400 Exports $850 Compensation of employees $11500 Government purchases $3200 Direct taxes $1200 Saving $1600 Imports $900 Using the expenditure approach: C + I + G + (X M) = ( ) = Using the income approach: Compensation of employees + Profit + depreciation = = Recall that depreciation has to be added in because it is taken out in the calculation of profit and we want to get back to gross domestic product. Question 3. The following table gives some figures from forecasts of real GDP (in 2005 dollars) and population done in mid According to the forecasts, approximately how much real growth will there be between 2018 and 2019? What is the per-capita real GDP projected to be in 2018 and in 2019? Compute the forecast rate of change in real GDP and per-capita real GDP between 2018 and Real GDP 2018 (billions) $18121 Real GDP 2019 (billions) $18375 Population 2018 (millions) 329,3 Population 2019 (millions) 331,9 Growth in real GDP: [( ) / 18121] x 100 = 1,4% Per capita GDP for 2018: / 329,3 = 55,029 Per capital GDP for 2019: / 331,9 = 55,363 Growth in real per capita GDP: [(55,363 55,029) / 55,029] x 100 = 0,6% 3

4 Question 4. Gorgonzola is a small island nation with a simple economy that produces only six goods: sugar cane, yo-yos, rum, peanuts, harmonicas, and peanut butter. a. Use the production and price information in the table to calculate nominal GDP for b. Use the production and price information in the table to calculate real GDP for 2013, 2014, and 2015 using 2013 as the base year. What is the growth rate of real GDP from 2013 to 2014 and from 2014 to 2015? c. Use the production and price information in the table to calculate real GDP for 2013, 2014, and 2015 using 2014 as the base year. What is the growth rate of real GDP from 2013 to 2014 and from 2014 to 2015? Quantity Price ($) Quantity Price ($) Quantity Price ($) Sugar cane Yo-yos Rum Peanuts Harmonicas Peanut butter (a) Nominal GDP = (225 x $1.15) + (750 x $4.00) + (180 x $15.00) + (225 x $2.50) + (85 x $30.00) + (85 x $5.00) = $ $3, $2, $ $2, $ = $ (b) Real GDP for 2013 = (180 x $0.80) + (600 x $2.50) + (150 x $10.00) x (250 x $2.00) + (75 x $25.00) + (100 x $4.50) = $5969. Real GDP for 2014 = (180 x $0.80) + (700 x $2.50) + (160 x $10.00) x (225 x $2.00) + (75 x $25.00) + (85 x $4.50) = $ Real GDP for 2015 = (225 x $0.80) + (750 x $2.50) + (180 x $10.00) x (225 x $2.00) + (85 x $25.00) + (85 x $4.50) = $ The growth rate of real GDP during 2013 = [($ $5969) / $5969] x 100 = 3.90%. The growth rate of real GDP during 2014 = [($ $ ) / $ ] x 100 = 9.85%. 4

5 (c) Real GDP for 2013 = (180 x $1.00) + (600 x $3.00) + (150 x $12.00) x (250 x $2.50) + (75 x $30.00) + (100 x $4.50) = $7105. Real GDP for 2014 = (180 x $1.00) + (700 x $3.00) + (160 x $12.00) x (225 x $2.50) + (75 x $30.00) + (85 x $4.50) = $7395. Real GDP for 2015 = (225 x $1.00) + (750 x $3.00) + (180 x $12.00) x (225 x $2.50) + (85 x $30.00) + (85 x $4.50) = $8130. The growth rate of real GDP during 2013 = [($7395 $7105) / $7105] x 100 = 4.08%. The growth rate of real GDP during 2014 = [($8130 $7395) / $7395] x 100 = 9.94%. Question 5. Using the below table for an economy, please calculate a) nominal income. b) real income using Year 2 as base year. c) GDP Deflator. GDP Deflator GDP( current prices) = x100 GDP( base year prices) Calculation of Nominal and Real National Income Quantity Produced Prices Wheat Steel Wheat Steel Year Year Nominal National Income Year 1 (100x10)+(20x50)=2000 Year 2 (110x12)+(16x55)=2200 Real National Income using Year 2 prices as base year Year 1 (100x12)+(20x55)=2300 Year 2 (110x12)+(16x55)=2200 Calculation of GDP Deflator Year 1 (2000/2300)x100=86.9 Year 2 (2200/2200)x100=100 5

6 Question 6. Freestone is an isolated community that produces only three final goods: pizza, notebooks, and tonic water. Information on population, nominal prices and total output for each good in the years 1980 and 2004 is given below price output price output pizza notebooks tonic water a) Calculate nominal GDP for b) Calculate nominal GDP for c) Calculate real GDP for 1980 and 2004 if the BASE YEAR is d) Calculate real GDP for 1980 and 2004 if the BASE YEAR is e) What is the implicit GDP deflator for 1980 and for 2004? (Use 1980 as the base year.) f) What is the implicit GDP deflator for 1980 and for 2004? (Use 2004 as the base year.) g) By what percent has the price level increased between 1980 and 2004? (Use GDP deflators from part f as price indices). h) Assume that the base year is 1980 and in the basket purchased by the representative consumer there is one pizza and one bottle of tonic water. What is CPI for 1980? What is CPI for 2004? What is rate of inflation? a) Nominal GDP for 1980 = (1.00*1) + (4.00*4) + (1.50*2) = $20 millions b) Nominal GDP for 2004 = (2.75*3) + (7.00*10) + (2.50*4) = $88.25 millions c) Real GDP for 1980 is equal to Nominal GDP for 1980 since 1980 is the base year. Real GDP for 2004 if 1980 is the base year = (1.00*3) + (4.00*10) + (1.50*4) = $49 millions. d) If the base year is 2004, Real GDP for 2004 is equal to Nominal GDP for 2004=$88.25 millions. Real GDP for 1980 if the base year is 2004= 6

7 (2.75*1)+(7.00*4)+(2.50*2)=$35.75 millions. e) If 1980 is the base year, The GDP deflator for 1980 equals 100 GDP deflator 1980 = (Nominal GDP 1980/Real GDP 1980)*100=(20/20)*100=100. GDP deflator for 2004 = [(Nominal GDP2004) / (Real GDP2004)] *100 = (88.25/49)*100 = 180 f) If 2004 would be the base year, GDP deflator for 2004 would be 100. GDP deflator 2004 =(Nominal GDP 2004)/(Real GDP 2004)*100 =(88.25/88.25)*100=100. And GDP deflator for 1980 would be: GDP deflator 1980 = (Nominal GDP 1980)/Real GDP 1980)*100 =(20/35.75)*100= g) Inflation Rate = [(Deflator GDP2004) - (Deflator GDP1980)/ (Deflator GDP1980)] *100= [( )/ 100] *100 = 80% h) Given: in the basket of representative consumer is one pizza and one tonic water. If the base year is 1980, CPI index for 1980 is 100. CPI 1980 = (basket value price 1980 / basket value price 1980) *100 = 100 CPI 2004 = (basket value price 2004 / basket value price 1980) *100= [(1*2.75)+(1*2.50)]/[(1*1.00)+(1*1.50)]*100 =210 Inflation rate= {[CPI (2004) - CPI (1980)]/ CPI (1980)}*100=110% 7