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HW1Solutions

# HW1Solutions - EC320L HW1 SOLUTIONS Questions for Review 14...

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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 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. 4. Price and quantity data are given as the following.

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Year 1 Good Quantity Price Computers 20 \$1,000

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Year 2 Good Quantity Price Computers 25 \$1,500

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(a)Year 1 nominal GDP = × + × = 20 \$1,000 10,000 \$1.00 \$30,000 . Year 2 nominal GDP = × + × = 25 \$1,500 12,000 \$1.10 \$50,700 . With year 1 as the base year, we need to value both years’ production at year 1 prices. In the base year, year 1, real GDP equals nominal GDP equals \$30,000. In year 2, we need to value year 2’s output at year 1 prices. Year 2 real GDP = × + × = 25 \$1,000 12,000 \$1.00 \$37,000 . The percentage change in real GDP equals (\$37,000 - \$30,000)/\$30,000 = 23.33%. Following the procedure in the book we next calculate chain-weighted real GDP. I will also accept solutions which just took the average of two year prices and calculated the real GDP using the average prices. In the exam, I will not ask any questions about chain-weighting scheme. At year 1 prices, the ratio of year 2 real GDP to year 1 real GDP equals g 1 = (\$37,000/\$30,000) = 1.2333. We must next compute real GDP using year 2 prices. Year 2 GDP valued at year 2 prices equals year 2 nominal GDP = \$50,700. Year 1 GDP valued at year 2 prices equals (20 × \$1,500 + 10,000 × \$1.10) = \$41,000. The ratio of year 2 GDP at year 2 prices to year 1 GDP at year 2 prices equals g 2 = (\$50,700/\$41,000) = 1.2367. The chain-weighted ratio of real GDP in the two

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