ECON 302 Fall 2009 Answers to Assignment 1 1 Homework will be graded for both content and neatness Sloppy or illegible work will not receive full credit This homework requires the use of Microsoft Excel 1 Assume that the economy is composed of three firms Albert s furniture Firm A Brian s lumber yard Firm B and Carl s timber harvesting Firm C As their names suggest Firm B purchases timber from Firm C to produce lumber which is then used by Firm A to produce furniture Albert directly sells his furniture to consumers Therefore only Firm A is producing a final good Assume that all intermediate goods are used in the production final goods Sales Raw Materials Wages Interest Payments Rent Profit Factor Expenditures Value Added Firm A Firm B Firm C 7 000 3 000 2 000 1 500 750 1 250 500 250 50 600 100 1 130 300 210 360 Factor of Production Labor Capital Land Entrepreneurship Factor Payment Wages Interest Rent Profit A Complete the table Firm A Firm B Firm C Sales 7 000 3 000 2 000 Raw Materials 3 000 2 000 0 Wages 1 500 250 1 130 Interest Payments 750 50 300 Rent 1 250 600 210 Profit 500 100 360 Factor Expenditures 4 000 1 000 2 000 Value Added 4 000 1 000 2 000 B Compute GDP using the following equivalent approaches i Product Only Firm A produces a final good The total market value of Firm A s output is 7000 Therefore the product approach says that GDP is 7000 ECON 302 Fall 2009 Answers to Assignment 1 ii 2 Expenditure Consumers are spending 7000 on final goods services so GDP via the expenditure approach is also 7000 In other words C 7000 I 0 G 0 NX 0 Y C I G NX 7000 iii Value Added GDP sum of the value added by firms 4000 1000 2000 7000 iv Income GDP sum of factor income sum of factor payments made by firms 4000 1000 2000 7000 C Although they agree theoretically briefly discuss why these four approaches to calculating GDP may disagree when applied to a real world industrialized economy such as the United States Does this inconsistency suggest that GDP is a poor measure of economic activity Why or why not Real world data is subject to measurement error and accounting mistakes so it is not unreasonable that the different methods used in calculating GDP would disagree slightly Any proposed measure of the level of economic activity in a country would be affected by these problems so such inconsistency does not imply that GDP is a poorly constructed measure However we should be worried if the various GDP approaches are giving us wildly different results ECON 302 Fall 2009 Answers to Assignment 1 3 2 Working as a research assistant the US Bureau of Economic Analysis BEA has provided you with the following table concerning quarterly US GDP However the file has been corrupted with multiple entries missing The use of Excel is required for this problem 2008 2008 2008 2008 I II III IV Gross domestic product 14 373 90 14 497 80 14 546 70 14 347 30 Personal consumption expenditures 10 095 10 10 194 70 10 220 10 10 009 80 Goods 3 447 20 3 474 90 3 463 00 3 227 50 Durable goods 1 145 80 1 126 50 1 088 50 1 019 90 Nondurable goods 2 301 40 2 348 40 2 374 50 2 207 60 6 647 90 6 719 80 6 757 10 6 782 30 2 214 80 2 164 60 2 142 70 2 022 10 Fixed investment 2 223 00 2 214 00 2 179 60 2 066 60 Nonresidential 1 705 00 1 719 70 1 711 00 1 638 70 586 30 610 6 620 4 620 7 1 118 70 1 109 20 1 090 60 1 018 00 518 1 494 30 468 6 427 8 8 2 49 40 36 90 44 5 744 50 738 7 757 5 590 5 1 803 60 1 901 50 1 913 10 1 706 20 1 247 30 1 326 20 1 338 50 1 155 70 Services Gross private domestic investment Structures Equipment and software Residential Change in private inventories Net exports of goods and services Exports Goods Services 556 30 575 3 574 6 550 5 2 548 10 2 640 20 2 670 50 2 296 70 2 143 20 2 226 80 2 243 30 1 892 50 404 9 413 4 427 20 404 2 and gross investment 2 808 40 2 877 10 2 941 40 2 905 90 Federal 1 114 30 Imports Goods Services Government consumption expenditures 1 038 40 1 069 50 1 108 30 National defense 703 6 725 6 763 60 758 9 Nondefense 334 8 343 9 344 7 355 40 1 770 00 1 807 60 1 833 10 1 791 60 State and local A Complete the table See above B Are imports added to or subtracted from US GDP Provide a short rationale Subtracted imported goods are not produced in the US and should only be counted in the GDP of the originating country Adding imports to US GDP would effectively double count those goods Using the expenditure approach imports are included in C e g if a household purchases a bottle of French ECON 302 Fall 2009 Answers to Assignment 1 4 wine the expenditure will be recorded as part of consumption expenditure but then subtracted out in NX This prevents the inclusion of imported goods in domestic output when computing GDP using the expenditure approach C Your faculty advisor notices that US net exports increased substantially in the fourth quarter of 2008 This coincided with the worst of the financial crisis during which international trade declined sharply Strictly looking at the data what is your explanation for this Both exports and imports declined but the fall in imports was larger Therefore net exports increased In other words the decline in imports outweighed the decline in exports D In 2008 stock market indices lost 20 25 of their value Housing prices continued to collapse and many households viewed real estate as an important form of wealth Given these economic events give a brief argument as to why US imports fell by 15 Devalued stock markets and falling housing prices both imply that consumer wealth is decreasing so consumer demand for both durable and non durable goods should decrease This includes demand for imported goods and services which explains the decline in US imports ECON 302 Fall 2009 Answers to Assignment 1 5 3 The following question deals with the GDP accounting equation and an approximation discussed by Mankiw 7e on p 26 Equations 1 4 are provided so you can take them as known already stands for percentage change and is defined in the typical way as Y Y Y Y Y Y YN C I G NX 1 YR YN GDP Deflator YN D 2 AB A B 3 A B A B 4 Variable YN YR C …