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answer key prelim review

answer key prelim review - Economics 3140 Suggested...

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Economics 3140 Suggested Solutions to Practice Prelim 1 and Additional Review Questions February 10, 2009 1. (a) Yes - Since the production by General Motors takes place in America, it is a part of American GDP. (b) No - Since production of Toyota takes place in Japan. (c) No - GDP does not take into account services that are not priced in the market. (2 points for each part - Total 6 points) 2. (a) Income Method - Sum of factor incomes = Wages + Interests = ($6 + $2 + $9) + ($4 + $8 + $1) = $30 : Value Added Method - Value added at each stage of production TIRE = $(10 0) = $10 ( Stage 1) + CAR 1 + CAR 2 TIRE = $(17 + 13 10) = $20 ( Stage 2) = ) Total = $(10 + 20) = $30 : Final Sales Method - Sale of Final Goods = CAR 1 + CAR 2 = $(17 + 13) = $30 : (3 points for each approach, total 9 points) 1
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(b) Now we know from the basic National Income Accounting Iden- tity: GDP = C + I + G: Also, we know government purchases = G = $2 + $1 = $3 : = ) C + I = $30 $3 = $27 : Since CAR1 is the consumption good, total expenditure on CAR1(Govt consumption expenditure + Private consumption expenditure) equals: $7 + $8 + $2 = $17 : Now, out of this, we know government consumption expenditure is $2. Therefore, private consumption expenditure is C = $17 $2 = $15 : Next, since CAR2 is the capital good, total investment expendi- ture is $3 + $9 + $1 = $13 : Out of this total, we know government investment expenditure is $1. Hence domestic private investment is I = $13 $1 = $12 : (3 points each for C and I , total 6 points) 3. NGDP 1999 = X ( P 1999 ± Q 1999 ) = $65 : RGDP 1999 = X ( P 1998 ± Q 1999 ) = $25 : The GDP de±ator of 1999 is thus the ratio of NGDP 1999 and RGDP 1999 : GDPDeflator 1999 = NGDP 1999 RGDP 1999 ± 100 = 65 25 ± 100 = 260 : 2
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(b) The CPI of 1999 (base year = 1998) is the ratio of total consump- tion expenditures on the 1998 bundle of commodities at 1999 and 1998 prices: CPI 1999 = P P 1999 Q 1998 P P 1998
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answer key prelim review - Economics 3140 Suggested...

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