AK_PS1 - ECON 102(Winter Quarter 2007 Answer Key for...

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ECON 102 (Winter Quarter 2007) Answer Key for Problem Set 1 January 28, 2007 Problem 1 (National Income and Product Account- ing) Recall the four key components of GDP: 1. Consumption (C) (a) durables (b) non-durables (c) services 2. Investment (I) (a) business °xed investment (b) residential °xed investment (c) inventory investment 3. Government Spending (G) 4. Net Exports (NX) With this in mind, here are the answers to questions (a) through (l): (a) Not re°ected in GDP. Underground economy. 1 1 If this undergrad is honest, he reports his income to the IRS in which case consumption of services will increase by $100. 1
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(b) Not re°ected in GDP. Cash transfer within a household. 2 (c) GDP rises. Business investment or possibly government spending since UCLA is a public university. (d) GDP rises. Government spending. (e) Not re°ected in GDP. Underground economy; note, however, that the ingredients you purchased at the supermarket do show up in GDP as consumption of non-durables. (f) Not re°ected in GDP. (see (e) above) (g) GDP rises. Non-durable consumption rises when Trader Joe±s sells the ²EconoBrew³(using the expenditure method); using the value-added (VA) method, VA rises a °rst time when you sell the beer to Trader Joe±s (by the di/erence between price and the cost of ingredients) and again when Trader Joe±s sells the product to consumers (by the di/erence between the price TJ±s paid you and the price the consumer paid). (h) GDP rises. Inventory investment, i.e. UCLA Press purchases its own unsold books. (i) Not re°ected in GDP. The book was produced earlier and hence ac- counted for in GDP in that earlier period.
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