Econ3140 Pset1 Answers - Economics 3140-1 Spring 2012...

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Economics 3140-1 Spring 2012 Problem Set 1: Suggested Solutions Question 1: a. Real GDP falls because Disney does not produce any services while it is closed. This corresponds to a decrease in economic well-being because the income of workers and shareholders of Disney falls (the income side of the national accounts), and people’s consumption of Disney falls (the expenditure side of the national accounts.) b. Real GDP rises because the original capital and labor in farm production now produce more wheat. This corresponds to an increase in the economic well-being of society, since people can now consume more wheat. (If people do not want to consume more wheat, then farmers and farmland can be shifted to producing other goods that society values.) c. Real GDP falls because with fewer workers on the job, firms produce less. This accurately reflects a fall in economic activity. d. Real GDP falls because the firms that lay off workers produce less. This decreases economic well-being because workers’ income fall (the income side), and there are fewer goods for people to buy (the expenditure side). e. Real GDP is likely to fall, as firms shift toward production methods that produce fewer goods but emit less pollution. Economic well-being, however, may rise. The economy now produces less measured output but more clean air; clean air is not traded in markets and, thus, does not show up in measured GDP, but is nevertheless a good that people value. f. Real GDP rises because the high-school students go from an activity in which they are not producing market goods and services to one in which they are. Economic well-being, however, may decrease. In ideal national accounts, attending school would show up as an investment because it presumably increase the future productivity of the worker. Actual national accounts do not measure this type of investment. Note also that future GDP may be lower than it would be if the students stayed in school, since the future work force will be less educated. g. Measured real GDP falls because fathers spend less time producing market goods and services. The actual production of goods and services need not have fallen however. Measured production (what the fathers are paid to do) falls, but unmeasured production of child-rearing services rises.
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Question 2: Note: For the entirety of the problem define r = R/P (the real rental rate of capital) and w = W/P (the real wage rate). a.
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Econ3140 Pset1 Answers - Economics 3140-1 Spring 2012...

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