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# problem+set+3+solutions - Econ 1 Fall 2010 Problem Set 3...

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Unformatted text preview: Econ 1, Fall 2010 Problem Set 3 Solutions University of California, Berkeley Page 1 of 9 Problem Set #3 Solutions 1. Explain whether or not, why, and how the following items are included in the calculation of GDP: a. The sale of a washing machine that had been produced here at home last year and carried over in inventory. The full retail price of the washing machine will be counted in the year it is sold, and it will be counted in C if purchased by a household, in I if purchased by a firm, or in G if purchased by part of the government. Additionally, the price at which the item was accounted when it entered inventory last year (the wholesale price, perhaps) is deducted from GDP in the year it is sold to reflect the decrease in inventory investment. b. The sale of a washing machine newly-made at home this year. The full retail price of the washing machine will be counted in the year it is sold, and it will be counted in C if purchased by a household, in I if purchased by a firm, or in G if purchased by part of the government. c. The sale of a washing machine newly-made abroad this year and imported. The full retail price of the washing machine will be counted. It enters GDP negatively through the category IM and positively in C if purchased by a household, in I if purchased by a firm, or in G if purchased by part of the government. If the magnitude of IM and C , I , or G is the same these will cancel out, 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 washing machine also reflects the costs of U.S. distributors and retailers. The net contribution to GDP would be positive due to the production of these services. d. The sale of a washing machine made abroad and imported last year. The full retail price of the washing machine will be counted in the year it is sold, and it will be counted in C if purchased by a household, in I if purchased by a firm, or in G if purchased by part of the government. Additionally, the wholesale price that the firm paid for the washing machine last year is now deducted from GDP to reflect the decrease in inventory investment. The fact that the washing machine was imported was accounted for last year, when IM increased in magnitude by the price paid by the importer and I also increased by the wholesale price of the washing machine to reflect the increase in inventory investment. Econ 1, Fall 2010 Problem Set 3 Solutions University of California, Berkeley Page 2 of 9 2. Solve for the equilibrium level of real GDP Y in the Keynesian framework: Y = C + I + G + NX , C = c o + c y Y : a. With c o = \$5 trillion/year, c y = 2/3, I = \$3 trillion/year, G = \$3 trillion/year, NX = -\$1 trillion/year g G¡ = ¢ £ + ¤ + ¥ + ¦§ ¨ − ¢ © = ª + « + « − ¨ ¨ − ¬ « = ¨£ ¨ « = «£, ­®¯­ °±, _ \$«£ ­²°³³°´µ/¶·¯² b. With c o = \$5 trillion/year, c y = 2/3, I = \$4 trillion/year, G = \$2 trillion/year, NX = -\$2 trillion/year...
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problem+set+3+solutions - Econ 1 Fall 2010 Problem Set 3...

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