PRELIM1_SOL

# PRELIM1_SOL - Economics 3140 Suggested Solutions Prelim 1...

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Economics 3140: Suggested Solutions Prelim 1 TA: Romita Mukherjee October 2, 2008 (1) (a) Yes - Since the production by General Motors takes place in Amer- ica, 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 Identity: 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 \$17 - \$2 = \$15 Next, since CAR2 is the capital good, total investment expenditure is \$3 + \$9 + \$1 = \$13 Out of this total, we know Government investment expenditure is \$1. Hence domestic private investment is \$13 - \$1 = \$12 (3 points each for G and C , total 6 points) Thanks to Venus Yu for pointing out my initial mistake on this problem.
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