Homework 1 Solutions

# Homework 1 Solutions - Homework 1 Solutions Exercise 1(a...

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Homework 1: Solutions Exercise 1 (a) Actual Percentage Growth Rates, 1996–2005. Year Real Per Capita GNP %Growth 1995 \$30,525 1996 \$31,396 2.85 1997 \$32,520 3.58 1998 \$33,544 3.15 1999 \$34,367 2.45 2000 \$35,265 2.61 2001 \$35,165 -0.28 2002 \$35,368 0.58 2003 \$35,895 1.49 2004 \$36,939 2.91 2005 \$37,773 2.26 (b) Approximate Percentage Growth Rates, 1996–2005. Year Real Per Capita GNP %Growth 1995 \$30,525 1996 \$31,396 2.81 1997 \$32,520 3.52 1998 \$33,544 3.10 1999 \$34,367 2.42 2000 \$35,265 2.58 2001 \$35,165 -0.28 2002 \$35,368 0.58 2003 \$35,895 1.48 2004 \$36,939 2.87 2005 \$37,773 2.23 The approximation is extremely close. The approximation works well for small percentage changes. (c) Actual Percentage Growth Rates for Decades, 1950–2000. Year Real Per Capita GNP %Growth 1950 \$11,745 1960 \$13,951 18.78 1970 \$18,561 33.04

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1980 \$22,784 22.75 1990 \$28,598 25.52 2000 \$35,265 23.31 Approximate Percentage Growth Rates. Year Real Per Capita GNP %Growth 1950 \$11,745 1960 \$13,951 17.21 1970 \$18,561 28.55 1980 \$22,784 20.50 1990 \$28,598 22.73 2000 \$35,265 20.96 The approximation is still relatively close, but the approximation errors are larger because the growth rates are larger. Note that the approximation formula actually calculates the continuously compounded growth rate. (d) Growth is fastest in the 1960s. Growth is slowest in the 1950s. Exercise 2 Wheat and Bread (a) Product approach: Firm A produces 50,000 bushels of wheat, with no intermediate goods inputs. At \$3/bu., the value of Firm A’s production is equal to \$150,000. Firm B produces 50,000 loaves of bread at \$2/loaf, which is valued at \$100,000. Firm B pays \$60,000 to firm A for 20,000 bushels of wheat, which is an intermediate input. Firm B’s value added is therefore \$40,000. GDP is therefore equal to \$190,000. (b) Expenditure approach: Consumers buy 50,000 loaves of domestically produced bread at \$2/loaf and 15,000 loaves of imported bread at \$1/loaf. Consumption spending is therefore equal to \$100,000 + \$15,000 = \$115,000. Firm A adds 5,000 bushels of wheat to inventory. Wheat is worth \$3/bu., so investment is equal to \$15,000. Firm A exports 25,000 bushels of wheat for \$3/bu. Exports are \$75,000. Consumers import 15,000 loaves of bread at \$1/loaf. Imports are \$15,000. Net exports are equal to \$75,000 \$15,000 = \$60,000. There is no government spending. GDP is equal to consumption (\$115,000) plus investment (\$15,000) plus net exports (\$60,000). GDP is therefore equal to \$190,000.
(c) Income approach: Firm A pays \$50,000 in wages. Firm B pays \$20,000 in wages. Total wages are therefore \$70,000. Firm A produces \$150,000 worth of wheat and pays \$50,000 in wages. Firm A’s profits are \$100,000. Firm B produces \$100,000 worth of bread. Firm B pays \$20,000 in wages and pays \$60,000 to Firm A for wheat. Firm B’s

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Homework 1 Solutions - Homework 1 Solutions Exercise 1(a...

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