Answers to Homework #3
Due 3/7/11 at the lecture
Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly). Make sure you write your name as it appears on your ID so that you can receive the correct grade. Please remember the section number for the section you are registered, because you will need that number when you submit exams and homework. Late homework will not be accepted so make plans ahead of time. Please show your work. Good luck!
You may use a calculator to do all of the calculations. Round all decimals to the nearest hundredth if necessary.
GDP ...view middle of the document...
Every year NFC rents land and hires labor from the residents on the island to produce food. If it produces more food than the amount consumed by residents on the island, then this excess supply is exported to other economies. At the same time, NCC borrows money from the island residents to buy cotton cloth from SuHang, a neighboring island. NCC then hires labor to produce clothes using this cotton cloth. Clothes produced in PengLai by NCC are not exported: all clothing produced by NCC stays in PengLai.
Suppose last year NFC produced 1000 tons of food and NCC produces 200,000 articles of clothing. 900 tons of the food and 160,000 articles of clothing were consumed domestically; the rest of the food was exported. The price of food was $1000 per ton and the unit price of clothes was $10 per articles of clothing. NFC paid $300,000 rent to land owners and $600,000 in wages to labor. NCC borrowed $1,000,000 to buy cotton cloth while it paid $50,000 in interest for this loan and $850,000 in wages to labor.
What is the value of GDP in PengLai last year based on the given information? Calculate GDP using the expenditure approach, the income approach and the value added approach. Do all three approaches provide the same measure of GDP? (If they don’t give the same number you have made an error: go back and review your work and fix the error.)
(1) Expenditure approach
Consumption (C) =value of consumed food + value of consumed clothes = 1000*900 + 10*160000 =2.5 million
Investment (I) = value of unsold clothes which goes to stock =10*(200000-160000)=0.4 million
Net export (NX) = export – import = value of exported food – value of imported cloth = 1000*(1000-900) – 1000000 = -0.9 million
Government spending (G) = 0
GDP= C + I + NX + G =2.5 + 0.4 -0.9 + 0 = 2 (million)
(2) Income approach
Rent = 0.3 million
Wage = 0.6 + 0.85 =1.45 million
Interest = 0.05 million
Profit = Profit of NFC + Profit of NCC = (1000*1000 – 0.3million – 0.6million) + (200000*10 – 1million – 0.05million – 0.85million) =0.2 million
GDP = rent + Wage + interest + profit = 0.3 + 1.45 +0.05 + 0.2 = 2 million
(3) Value added approach
GDP = Value added from NFC + Value added from NCC = 1000*1000 + (200000*10 -1million) = 2 million
Real vs. Nominal
3. In the following table is data showing US GDP and inflation for the past ten years. Nominal and real GDP series are taken from the website of the US Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp), while the last column is calculated from CPI data provided at the website of the US Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/surveymost?bls, CPI for All Urban Consumers (CPI-U) 1982-84=100 (Unadjusted) - CUUR0000SA0 ). You are encouraged to use excel or other software to do the following calculations.
Year Nominal GDP
in billions Real GDP
in billions GDP deflator1 GDP deflator2 Inflation (%) Inflation from CPI (%)
2001 10,286.2 11,347.2 100 - -
2002 10,642.3 11,553.0 1.58