HW1 Solutions - HW1 Solutions Ch 2 4 a The airplane sold to...

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HW1 Solutions Ch 2 4. a. The airplane sold to the Air Force counts as government purchases because the Air Force is part of the government. b. The airplane sold to American Airlines counts as investment because it is a capital good sold to a private firm. c. The airplane sold to Air France counts as an export because it is sold to a foreigner. d. The airplane sold to Amelia Earhart counts as consumption because it is sold to a private individual. e. The airplane built to be sold next year counts as investment. In particular, the airplane is counted as inventory investment, which is where goods that are produced in one year and sold in another year are counted. 5. Data on parts (a) to (g) can be downloaded from the Bureau of Economic Analysis (—follow the links to Gross Dometic Product). Most of the data (not necessarily the earliest year) can also be found in the Economic Report of the President. By dividing each component (a) to (g) by nominal GDP and multiplying by 100, we obtain the following percentages: (Note: These data were downloaded February 8, 2012, from the BEA Web site.) Among other things, we observe the following trends in the economy over the period 1950–2012: (a) Personal consumption expenditures have been around two-thirds of GDP, although the share increased markedly between 1980 and 2005. (b) The share of GDP going to gross private domestic investment fell slightly from 1950 to 2005. It fell sharply from 2005 to 2012 due to the 2007–2009 recession. (c) The share going to government consumption purchases rose sharply from 1950 to 1980. (d) Net exports, which were positive in 1950, have been negative since that time. (e) The share going to national defense purchases has fallen slightly. (f) The share going to state and local purchases rose from 1950 to 1980. (g) Imports have grown rapidly relative to GDP.
6. a. i. Nominal GDP is the total value of goods and services measured at current prices. Therefore, ii. Real GDP is the total value of goods and services measured at constant prices. Therefore, to calculate real GDP in 2010 (with base year 2000), multiply the quantities purchased in the year 2010 by the 2000 prices: Real GDP for 2000 is calculated by multiplying the quantities in 2000 by the prices in 2000. Since the base year is 2000, real GDP 2000 equals nominal GDP 2000 , which is $10,000,000. Hence, real GDP stayed the same between 2000 and 2010. iii. The implicit price deflator for GDP compares the current prices of all goods and services produced to the prices of the same goods and services in a base year. It is calculated as follows: This calculation reveals that prices of the goods produced in the year 2010 increased by 52 percent compared to the prices that the goods in the economy sold for in 2000. (Because 2000 is the base year, the value for the implicit price deflator for the year 2000 is 1.0 because nominal and real GDP are the same for the base year.)
iv. The consumer price index (CPI) measures the level of prices in the economy. The CPI is called a fixed-weight index because it uses a fixed basket of goods over time to weight prices. If the base year is 2000, the CPI in 2010 is an

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