W2 tute answers.pdf - ECC1100 S1 2017 Week 2 Tutorial 1...

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ECC1100 S1 2017 1 Week 2 Tutorial 1. Textbook, chapter 1, Problem no 3 on page 43. We find the four components of expenditure: Consumption expenditures are 600. These already include household purchases of durable goods, so those would not be counted again. Investment expenditures equal residential construction (100) plus business fixed investment (100) plus inventory investment (change in stocks over the year, or 25), for a total of 225. Sales of existing homes and apartments are not counted in investment or GDP. Government purchases are 200. Government payments to retirees are transfers and are not counted. Net exports are exports (75) minus imports (50), or 25. GDP is the sum of the four components: 600 + 225 + 200 + 25 = 1050. 2. Using the circular flow of income, explain why expenditure = income= production. GDP equals aggregate income because one way to value production is by the cost of the factors of production employed. The cost of the factors of production employed wages, interest, rent and profit
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