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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 â€”\$21,758

#### Solution Preview

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

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?

(a) The amount of domestic output available for U.S. purchase is \$900â€”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
\$1050â€”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.

\$2.49