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    Measuring Gross Domestic Product

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    A. Measuring Gross Domestic Product

    1. Suppose, in a two-sector model, that individuals receive the following payments from the business sector: wages $520, interest $30 rent $ 10 and profits $80. Consumption spending is $550 and investment is $90.
    a. Find the market value of output and household saving
    b. What is the relationship of saving and investment
    .

    2. a) From the following data for the U.S.A., establish the amount of domestic output available for U.S. purchase and the total amount of goods and services available for U.S. purchase: GDP is $1000; gross exports equal $100 while gross imports are $150.

    (b) Does U.S. GDP always equal U.S. purchases of goods and services when there are international transactions?

    (c) What happen to U.S. GDP when U.S. imports increase ceteris paribus?

    B. MEASURING THE PRICE LEVEL

    1. Table 2-5 presents the price of and units of aggregate output for 199x and 199y.

    (a) Present in Table 2-6, nominal GDP for 199x and 199y.

    (b) Also calculate in Table 2-6 real output for 199y by measuring l99y output in l99x prices. What is the purpose of such a calculation?

    c) What is the GDP deflator in l99y?

    Table 2-5 Aggregate Output in a Five-Good Economy
    Good
    199x
    199y

    Units Produced
    Price
    Units Produced
    Price

    A
    25
    $1.50
    30
    $1.60

    B
    50
    7.50
    60
    8.00

    C
    40
    6.00
    50
    7.00

    D
    30
    5.00
    35
    5.50

    E
    60
    2.00
    70
    2.50
    Table 2-6 Nominal and real GDP for 199x and 199y

    Good
    Value of 199x Output
    199x prices
    Value of 99y Output
    99y prices
    Value of 99y Output
    199x prices

    A
    $ 37.50
    $ 48.00
    $ 45.00

    B
    375.00
    480.00
    450.00

    C
    240.00
    350.00
    300.00

    D
    150.00
    192.50
    175.00

    E
    120.00
    175.00
    140.00

    GDP
    $922.50
    $1245.50
    $1110.00

    2. What is a GDP deflator?
    3. (a) What is the CPI? (b) Does an increase in the CPI always indicate an increase in the consumer's
    cost of living?
    4. Suppose households purchase the categories of goods and services listed in Column 1 of Table 2-7; the relative importance of each category is given by the weight assigned in column 2. The price index for each category during year 1 and year 2 is found in columns 3 and 4, respectively.
    Table 2-7
    Category
    Price Index for Each Category

    Weight
    Year 1
    Year 2

    Food and beverages
    0.175
    270
    270

    Housing
    0.460
    300
    330

    Apparel
    0.046
    180
    180

    Transportation
    0.193
    280
    308

    Medical care
    0.049
    300
    330

    Entertainment
    0.036
    230
    241

    Other
    0.041
    250
    250

    1.000

    Table 2-8
    Category
    Year 1
    Year 2

    Food and beverages
    0.175(270)= 47.25
    0.175(270)= 47.25

    Housing
    0.460(300)= 138.00
    0.460(330)= 151.80

    Apparel
    0.046(180)= 8.28
    0.046(180)= 8.28

    Transportation
    0.193(280)= 54.04
    0.193(308)= 59.44

    Medical care
    0.049(300) = 14.70
    0.049(330) = 16.17

    Entertainment
    0.036(230) = 8.28
    0.036(241) = 8.68

    Other
    0.041(250) = 10.25
    0.041(250)= 10.25

    CPI
    280.80
    301.87

    (a) From the data, calculate the CPI for year 1 and year 2.
    (b) What is the rate of inflation between year 1 and year 2 as measured by the change in the CPI?
    5. What does the producers price index measure?

    C. MEASURING UNEMPLOYMENT AND THE UNEMPLOYMENT RATE
    1. What are the causes of unemployment?
    D. THE BALANCE OF PAYMENTS
    1. What does a balance-of-payments statement measure?

    2. Use the following data to measure a country's balance on merchandise trade, balance on current account, balance on capital account and balance of payments. There is no change in reserve assets held by governments and official agencies.
    1. The U.S.A. exports goods valued at $19,650.
    2. The U.S.A. imports merchandise valued at $21,758.
    3. U.S. citizens receive interest income of $3621 from foreign investments.
    4. Interest income of $1394 is paid on foreign-owned assets in the U.S.A.
    5. U.S. citizens' travel expenditures equal $1919.
    6. Foreign travel in the U.S.A. is $1750.
    7. U.S. unilateral transfers are $2388.
    8. U.S. capital outflow is $4174.
    9. U.S. capital inflow is $6612.
    The balance on merchandise trade is the difference between goods imported and goods exported:
    Exports of goods +$19,650
    Imports of goods —$21,758
    Balance on merchandise trade —$2,108

    © BrainMass Inc. brainmass.com October 9, 2019, 3:46 pm ad1c9bdddf
    https://brainmass.com/economics/international-trade/measuring-gross-domestic-product-12919

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    A. Measuring Gross Domestic Product

    1. Suppose, in a two-sector model, that individuals receive the following payments from the business sector: wages $520, interest $30 rent $ 10 and profits $80. Consumption spending is $550 and investment is $90.
    a. Find the market value of output and household saving
    b. What is the relationship of saving and investment
    Answer:

    a) the market value of final output is $640, found by adding wages of $520 + interest of $30 + rent of $10 + profits of $80 or by adding consumption and investment ($550+$90). Saving is $90, found by subtracting the $550 that individuals consume from their $640 income.
    b) Both saving and investment equal $90. this relationship always holds true in a two-sector model, since leakage must always equal injections.

    2. a) From the following data for the U.S.A., establish the amount of domestic output available for U.S. purchase and the total amount of goods and services available for U.S. purchase: GDP is $1000; gross exports equal $100 while gross imports are $150.

    (b) Does U.S. GDP always equal U.S. purchases of goods and services when there are international transactions?

    (c) What happen to U.S. GDP when U.S. imports increase ceteris paribus?

    Answer:

    (a) The amount of domestic output available for U.S. purchase is $900—the $1000 U.S. GDP less the $100
    of U.S. output which is exported. The total amount of goods and services available for U.S. purchase is
    $1050—the $900 from domestic production plus the $150 of imported goods and services.
    (b) Purchases of goods and services can be equal to, less than, or greater than domestic output depending
    upon gross exports and gross imports. When gross imports (Mg) exceed gross exports (Xg) and there is a negative net export (Xn) balance, U.S. purchases of goods and services exceed U.S. output [the situation depicted by the data for part (a)]. However, when there is a positive net export balance (gross exports exceed gross imports), US output is greater than US purchase of goods and services.
    (c)GDP in the USA falls since there are increased purchases of foreign-made goods and decrease purchases of US made goods.

    B. MEASURING THE PRICE LEVEL

    1. Table 2-5 presents the price of and units of aggregate output for 199x and 199y.

    (a) Present in Table 2-6, nominal GDP for 199x and 199y.

    (b) Also calculate in Table 2-6 real output for 199y by measuring l99y output in l99x prices. What is the purpose of such a calculation?

    c) What is the GDP deflator in l99y?

    Table 2-5 Aggregate Output in a Five-Good Economy
    Good
    199x
    199y

    Units Produced
    Price
    Units Produced
    Price

    A
    25
    $1.50
    30
    $1.60

    B
    50
    7.50
    60
    8.00

    C
    40
    6.00
    50
    7.00

    D
    30
    5.00
    35
    5.50

    E
    60
    2.00
    70
    2.50
    Table 2-6 Nominal and real GDP for 199x and 199y

    Good
    Value of 199x Output
    199x prices
    Value of 99y Output
    99y prices
    Value of 99y Output
    199x prices

    A
    $ 37.50
    $ 48.00
    $ ...

    Solution Summary

    Measuring Gross Domestic Product is accomplished.

    $2.19