FIU ECO 3202 - Answer to Homework for chapter 2

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Answer to Homework for chapter 2Review questions:(3) Intermediate goods and services are used up in producing other goods in the same period (year) in which they were produced, while final goods and services are those that are purchased by consumers or are capital goods that are used to produce future output. The distinction is important, because we want to count only the value of final goods produced in the economy, not the value of goods produced each step along the way.(5) The four components of spending are consumption, investment, government purchases, and net exports. Imports must be subtracted, because they are produced abroad and we want GDP to count only those goods and services produced within the country. For example, suppose a car built in Japan is imported into the United States. The car counts as consumption spending in U.S. GDP, but is subtracted as an import as well, so on net it does not affect U.S. GDP. However, it is counted in Japan’s GDP as anexport.Numerical questions: Your answer should have more details about the calculation than thebrief explanation below. (3) If ABC pays an additional $.5 million for computer chips from abroad, the results change slightly. The correct answer is easiest to see using the expenditure approach. As in part a, there is$3.8 million spent on final goods, but now there are also net exports of –$0.5 million. So the totalexpenditure on domestically produced goods is only $3.3 million. The productapproach gets thesame answer because the $0.5 million is a contribution to GDP of the country in which the chipswere made, and so must be deducted from the GDP of the United States. The value added in theUnited States is only $3.3 million. Finally, the income approach gives the same answer as in parta, except that the cost of importing the chips reduces ABC’s profits by $0.5 million, so the sumof the incomes is only $3.3 million.(5)Given data: I 40, G 30, GNP 200, CA –20 NX NFP, T 60, TR 25, INT 15, NFP 7 –9 –2. Since GDP GNP – NFP, GDP 200 – (–2) 202 Y. Since NX NFP CA, NX CA –NFP –20 – (–2) –18. Since Y C I G NX, C Y – (I G NX) 202 – (40 30 (–18)) 150.Spvt (Y NFP – T TR INT) – C (202 (–2) – 60 25 15) –150 30. Sgovt (T – TR – INT) –G (60 – 25 – 15) – 30 –10. S Spvt Sgovt 30 (–10) 20.(a) Consumption 150(b) Net exports –18(c) GDP 202(d) Net factor payments from abroad –2(e) Private saving 30(f) Government saving –10(g) National saving 20(6) You should show the detailed derivation instead of the end results in your answer.(c) The GDP deflator is the ratio of nominal GDP to real GDP. In the base year, nominal GDP equalsreal GDP, so the GDP deflator is 1. In the current year, the GDP deflator is $200,000/$178,000 1.124. Thus the GDP deflator changes by [(1.124/1) – 1] 100% 12.4% from the base year tothe current year.(d)Nominal GDP rose 257%, prices rose 12.4%, and real GDP rose 218%, so most of the increase innominal GDP is because of the increase in real output, not prices. Notice that the quantity oforanges quadrupled and the quantity of bananas more than


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