08 Spring Course Material

# 08 Spring Course Material - EC320L HW1 SOLUTIONS Questions...

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EC320L HW1 SOLUTIONS Questions for Review 14. National wealth is accumulated as increases in the domestic stock of capital (domestic investment) and increases in claims against foreigners (the current account surplus). Problems, Chapter 2 1. Product accounting adds up value added by all producers. The wheat producer has no intermediate inputs and produces 30 million bushels at \$3/bu. for \$90 million. The bread producer produces 100 million loaves at \$3.50/loaf for \$350 million. The bread producer uses \$75 million worth of wheat as an input. Therefore, the bread producer’s value added is \$275 million. Total GDP is therefore \$90 million + \$275 million = \$365 million. Expenditure accounting adds up the value of expenditures on final output. Consumers buy 100 million loaves at \$3.50/loaf for \$350 million. The wheat producer adds 5 million bushels of wheat to inventory. Therefore, investment spending is equal to 5 million bushels of wheat valued at \$3/bu., which costs \$15 million. Total GDP is therefore \$350 million + \$15 million = \$365 million. 5. Price and quantity data are given as the following: Year 1 Good Quantity (million lbs.) Price (per lb.) Broccoli 500 \$0.50 Cauliflower 300 \$0.80 Year 2 Good Quantity (million lbs.) Price (per lb.) Broccoli 400 \$0.60 Cauliflower 350 \$0.85 (a) Year 1 nominal GDP= 500 million x \$0.50 + 300 million x \$0.80= \$490 million Year 2 nominal GDP= 400 million x \$0.60 + 350 million x \$0.85= \$537.5 million Year 2 real GDP= 400 million x \$0.50 + 350 million x \$0.80= \$480 million Year 1 GDP deflator equals 100. Year 2 GDP deflator equals (\$537.5/\$480) × 100 = 111.9 The percentage change in the deflator equals 11.9%.

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(b) Year 1 production (market basket) at year 1 prices equals year 1 nominal GDP = \$490 million. The value of the market basket at year 2 prices is equal to 500 million x \$0.60 + 300 million x \$0.85= \$555 million
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08 Spring Course Material - EC320L HW1 SOLUTIONS Questions...

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