problem+set+1+solutions - Econ 1, Fall 2010 University of...

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Econ 1, Fall 2010 Problem Set 1 Solutions University of California, Berkeley Page 1 of 10 Problem Set #1 Solutions 1. Explain whether or not, why, and how the following items are included in the calculation of GDP: a. Increases in business inventories. Increases in business inventories are counted in the calculation of GDP so that new goods that are produced but go unsold are still counted in the year in which they are produced. Specifically, they count in I . b. Fees earned by real estate agents on selling existing homes. While the sale of existing homes is not counted in GDP (since the homes weren’t produced during the year in question), the service rendered by real estate agents needs to be counted. Thus the fees earned by real estate agents does count in the calculation of GDP, even when the transaction brokered is for an existing home. c. Social Security checks written by the government. Social Security checks written by the government do not count in GDP, since they do not involve the production of any good or service. More generally, transfers (or transformations) of wealth do not count in the calculation of GDP. d. Building of a new dam by the Army Corps of Engineers. The goods and services purchased by the government to build the dam will count in the calculation of GDP (in G ), but the value added over and above the cost of labor and materials is not counted. e. An economist earning $2,000 by giving a speech to members of San Francisco's Commonwealth Club. An economist earning $2,000 by giving a speech to San Francisco’s Commonwealth Club is producing a service, and the fee will be counted in the calculation of GDP (specifically, in C ). f. Interest that your parents pay on the mortgage they have on their house. Like all interest paid by households and the government, interest on a homeowner’s mortgage is not counted in the calculation of GDP since it is not assumed to flow from the production of goods and services. g. Purchases of foreign-made trucks by American residents. Purchases of foreign-made trucks by American residents are counted in the calculation of GDP, since the departure of income from the U.S. economy to economies abroad must be accounted for. They enter GDP negatively through the category IM and positively through C , I , or G depending on whether households, firms, or government agencies are making the purchase. If the magnitude of IM and C, I, or G is the same these will cancel out, which makes sense, since GDP is a measure of domestic production, not foreign production. In reality, C, I, or G may be slightly greater than IM in magnitude, since the final price of the trucks reflects the costs of U.S. distributors and retailers. The net contribution to GDP would be positive due to the production of these services.
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Econ 1, Fall 2010 Problem Set 1 Solutions University of California, Berkeley Page 2 of 10 h. Purchase of a remaindered item from inventory by T.J. Maxx from American Apparel. Remaindered items are bought and sold in a secondary market, and are thus not counted in
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problem+set+1+solutions - Econ 1, Fall 2010 University of...

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