PS 2 solutions - ECO1IMA PROBLEM SET NO 2: SAMPLE SOLUTIONS...

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Unformatted text preview: ECO1IMA PROBLEM SET NO 2: SAMPLE SOLUTIONS 1) The expenditure approach (which we use a great deal) is based on payment flows into businesses, the income approach is based on payments made by (out of) businesses and the production (or value‐added) approach is an industry­by­industry breakdown of the net flows into businesses. Each is of interest to policy‐makers (govt, firms, lobby groups), thus: expenditure approach for demand­side (interest rates, government spending, demographics, trade) income approach for supply­side (wages, taxes, dividends etc) policy and the production approach is useful for industry policy (tariffs, subsidies etc) making. 2) Many transactions between firms are for ‘intermediate goods’ or work‐in‐progress, so these would be double‐counted. E‐bay trades second‐hand products, which are not included in current GDP as they have been included previously (when produced). 3) They are not recorded as they do not incur any payments through firms that would be measured by the government statistical agency. Many of those things are not even ‘produced’, and very hard to put monetary value on. 4) GDP would change in a number of ways. For example, consumption and investment would be measurably increased, but the cost of enforcing the old laws would decrease, so Government spending would decrease. 5) There is no trade in goods and services when pension and similar payments are made, so these are classified as ‘transfer payments’ and not included in GDP. 6) By measuring the price of a representative “basket” of goods and services each year, and changing the contents of the basket infrequently. The mix of “items” in the basket is some average over the population, and does not perfectly represent that of any one individual. For example students are unlikely to have 8% of their purchases on furnishing, but a lot more than 3% on education. The elderly are often ‘mortgage free’, and hence spend a lot less than 20% on housing. 7) No, some errors occur because of the three problems of measurement: substitution bias, introduction of new goods, unmeasured quality changes. For more details see the text. 8) The bracelet has more than kept its purchasing power, as its value has gone up 6900%, which we get as (2100‐30)/30*100. The CPI has gone up (1500‐100)/100*100=1400%. Note: gold is often used as a store of value in uncertain times (the last 2 years are a good example). 9) Gallup World Poll 2006 figures. a. 3 variables are plotted against GDP: subjective well‐being, life satisfaction, smiling/laughing. They are mainly subjective (self reported) measures of ‘happiness’. You can see that they all give a similar picture, namely that GDP is positively correlated (related) to happiness. So ON AVERAGE, the richer the country the happier people (be careful: I do not claim that being richer MAKES one happier, the statement is about correlation, not causality. It could in theory be the other way round, i.e. being happy makes you richer, or there could be a third factor driving both GDP and happiness). Also notice that the relationship is not perfect: there are many pairs of countries in which the poorer country is happier. b. Maybe some question about relative satisfaction (relative to what respondent may expect out of life, which may be “keeping up with the Joneses”). We look forward to your ideas. c. That while GDP may not be a perfect measure of happiness, it is a good indicator of it. 10) Nominal GDP 2007 = $ 9,800 = (400*$7) + (1000*$4) + (3000*$1) Nominal GDP 2008 = $15,700 = (500*$8) + (1100*$5) + (3100*$2) Nominal GDP 2009 = $18,450 = (450*$9) + (1050*$6) + (2700*$3) Real GDP 2007 = $14,200 = (400*8) + (1000*5) + (3000*2) being 2007 quantities at 2008 prices Real GDP 2008 = $15,700 = (500*8) + (1100*5) + (3100*2) being 2008 quantities at 2008 prices Real GDP 2009 = $14,250 = (450*8) + (1050*5) + (2700*2) being 2009 quantities at 2008 prices GDP deflator 2007 = 69.0% = $9,800 / $14,200 the ratio of nominal GDP to real GDP, as a % GDP deflator 2008 = 100% = $15,700 / $15,700 *100 GDP deflator 2009 = 129.5% = $18,450/$14,250*100 Growth rate nominal GDP between 2008 & 2009 = 17.5% = (($18,450/$15,700)‐1)*100 Growth rate real GDP between 2008 & 2009 = ‐ 9.2% = (($14,250/$15,700)‐1)*100 Growth rate GDP deflator between 2008 & 2009 = 29.5% = ((129.5/100)‐1)*100 11) CPI 2007 = 70.1 = (((500*7)+(1100*4)+(3100*1))/$15700)*100 =2008 quantities at 2007 prices, compared to 2008 quantities at 2008 prices CPI 2008 = 100.0 = base year 2008 q @2008 prices, compared to itself CPI 2009 = 130 = ((500*9)+(1100*6)+(3100*3))/$15700)*100 = 2008 quantities at 2009 prices, compared to 2008 quantities at 2008 prices Inflation 2008 = 42.7% = growth of CPI as a % = ((100/70.1)‐1)*100 Inflation 2009 = 30.8% = growth of CPI as a % = ((130.8/100)‐1)*100 12) a. The government and many firms use the CPI to make cost‐of‐living adjustments to pensions and wages. Economists and the government use CPI to measure inflation and to help formulate macroeconomic policies. b. Yes, ABS must meticulously account for complicated pricing schemes, such as cell phone plans that have free night and weekend minutes, but charge extra for roaming and wireless messaging services. c. One example: The CPI only measures price changes in consumer spending, which in an open economy like Australia’s is less than 60% of GDP, so shouldn’t we be ALSO concerned about prices in the other 40% of the economy (investment, government and net exports)? ...
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This note was uploaded on 01/02/2011 for the course ECON 1 taught by Professor Drjanlibich during the Three '10 term at La Trobe University.

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