1.

The following is information from the national income accounts for a

hypothetical country:

GDP $ 6,000
Gross Investment 800
Net Investment 200
Consumption 4,000
Government Purchase of goods and services 1,100
Unemployment insurance payment provided 70
by government
Government Budget Surplus - 50

What is?
a. NDP?
b. Net Exports?
c. Government Taxes?
d. Disposable Personal Income?
e. Personal/Household Savings?

a. Since depreciation is defined as D = Igross - Inet = 800 - 200 = 600 ==>

NDP = GDP - D = 6,000 - 600 = 5,400.

b. From GDP = C + Igross + G + NX ==> NX = GDP - C – Ig - G ==>

NX = 6,000 - 4,000 - 800 - 1,100 = 100.

c. BS = TA - G - TR ==> TA = BS + G + TR ==>
= -50 + 70 + 1,100 = 1,120

d. YD = Y - TA + TR) ==>
6,000 – 1120 + 70 = 4,950

e. S = YD - C ==>
4,950- 4,000 = 950

2. Tata-Steel has an integrated steel plant that mines iron ore and coal. Then the
company converts this raw material (with some other inputs) into steel. Maruti
purchases the steel and converts it into Cars. Following are the details of this
economy:

Tata steel mines iron worth 200 Cr, Coal worth 100 Cr, and converts it into steel
worth 400 Cr. Maruti buys 300 Cr worth steel from Tata-steel and imports 200
 Cr worth other input material from abroad. It also had an inventory of 125 Cr
steel and 50 Cr worth inventory of cars at the beginning of the year. Maruti
produces new cars worth 800 Cr. It sells 500 Cr domestically of which 400 Cr is
bought by household sector and 100 Cr is bought by the Reliance. Maruti also
exports 250 Cr worth cars. The inventory of raw material at Maruti at the end of
the year is 75 Cr.

Calculate the GDP using Production side approach (identify value added by each
firm), and the expenditure side approach (identify components of aggregate
demand).

Production approach:

GVA by Tata-steel: GVO – IC

= 400 – 0 =400

GVO by Maruti: 800 Cr

IC by Maruti = Initial raw material inventory + Inputs purchased domestically +
Inputs imported – Final inventory of raw material

125 + 300 + 200 – 75 = 550

GVA by Maruti = 800- 550 = 250 Cr
Total GVA = 400 +250 = 650

Expenditure approach:
Consumption = 400
Investment Fixed = 100
Inventory Investment = Tata (400-300) + Maruti: Cars (800 – 500 +250) +Maruti: Raw
material (75- 125) = 100
Exports = 250
Imports = 200

Total = 400 + (100 +100) +250 -200 = 650

3. Assume that GDP is $ 6,000, Personal disposable income is $ 5,100, and the
government budget deficit is $ 200. Consumption is $ 3,800 and the trade deficit
is
$ 100.
a. How large is saving (S)?
b. How large is investment (I)?
c. How large is government spending (G)?
a.Household savings = YD - C = 5,100 - 3,800 = 1,300, Government saving = - 200, total
savings = 1300 -200 = 1100

b. From S (H) - I = (G + TR - TA) + NX ==>

I = S (H) - (G + TR - TA) - NX == >

I = 1,300 - 200 - (-100) = 1,200.

c. From Y = C + I + G + NX ==> G = Y - C - I - NX ==>

G = 6,000 - 3,800 - 1,200 - (-100) = 1,100.

Or

YD = Y - TA + TR ==> TA - TR = Y - YD = 6,000 - 5,100 ==> TA - TR = 900

From BS = TA - TR - G ==> G = (TA - TR) - BS = 900 - (-200) ==> G = 1,100.

4. Consider an economy that consists only of those who bake bread and those who
produce its ingredients. Suppose that this economy’s production is as Follows:
The baker produces 1.2 Million Loaves of bread, of which 1 million Loaves of
bread is sold at $ 2 each to consumers. The remaining gets spoiled. The
ingredient producers produce 1.2 million pounds of flour (sold at $1 per pound);
and 100,000 pounds each of yeast, sugar and salt (all sold at $ 1 per pound). The
flour, yeast, sugar and salt are sold only to bakers, who use them exclusively for
the purpose of making bread. There are no inventories at the beginning or end of
the year.

a. What is the value of output in this economy (i.e. nominal GDP?)

b. How much value is added to the flour, Yeast, sugar and salt when the bakers
turn them into bread?

a. Since nominal GDP is defined as the market value of all final goods and services currently
produced in this country, we can only measure the value of the final product (bread), and
therefore we get $2 million (since 1 million loaves are sold at $2 each). Spoiled good is
not to be counted (can be considered as a part of production process).

b. An alternative way of measuring GDP is to calculate all the value added at each step of
production. The total value of the ingredients (intermediate consumption) used by the
bakeries can be calculated as:

1,200,000 pounds of flour ($1 per pound) = 1,200,000

100,000 pounds of yeast ($1 per pound) = 100,000

 100,000 pounds of sugar ($1 per pound) = 100,000

100,000 pounds of salt ($1 per pound) = 100,000

________________________________________________________

= 1,500,000

Since $2,000,000 worth of bread is sold, the total value added at the bakeries is $500,000.

In the answer we assumed that all ingredients are fully utilized. What if there is an inventory
of raw materials and final material.

5. Apple, oranges, and computers are the only items being produced in an
economy. All these items are for the household’s final consumption expenditure
only. This is a closed economy with no intermediate consumption. Following are
the price and quantity details of the production in the economy, which is also
equivalent to consumption basket of the economy as well:

Apple Oranges Computers

Year Q P Q P Q P
2015 10 10 12 8 5 20
2016 11 12 13 10 7 18
2017 10 13 12 10 8 17
2018 11 13 14 9 9 15
2019 13 14 16 11 10 12

Calculate the following table:

Nominal Consumer Real CPI

Nominal Real GDP Real GDP Price Growth Inflation
Year GDP GDP Index Index Index Rate Rate
2015 296 296 100 100 100
2016 388 354 131 120 118 19.59 17.58
2017 386 356 130 120 115 0.56 -2.00
2018 404 402 136 136 129 12.92 12.02
2019 478 458 161 155 144 13.93 11.55
6. Assume last year's real GDP was $7,000 billion, this year's nominal GDP is
$8,820 billion, and the GDP-deflator for this year is 120. What was the growth
rate of real GDP?

RGDP(1) = [NGDP(1)/GDP-deflator]*100 = [8,820/120]*100 = 7,350

Since RGDP(0) = 7,000 it follows that the growth rate of RGDP is

 y = [7,350 - 7,000]/7,000 = 0.05 = 5%.

7. Assume that both nominal and real GDP in 2000 was $7,000 billion (2000 is the
base year, so nominal and real GDP will be exactly same: think of this). Nominal
GDP in 2004 was $8,316 billion, and the GDP-deflator has increased from 100 to
110 between 2000 and 2004. What is the average annual growth rate of real GDP
from 2000 to 2004? Do you think the welfare of all people in the country has
increased during that time? Why or why not?

RGDP = (NGDP/deflator)*100 = (8,316/110)*100 = 7,560

Growth rate of GDP = (7,560 – 7,000)/7,000 = 560/7,000 = 0.08 = 8%
Therefore real GDP has grown 8% in four years, or at an average annual growth rate of
2%. If estimated precisely it would be 1.924%

An increase in a country's GDP is not a good measure of an increase in the economic

welfare of its people. For example, nominal GDP can change solely due to inflation, and
real GDP has to grow faster than the population for real income per capita, and thus living
standards, to increase. But real GDP per capita still does not take into account changes in
the distribution of income, changes in environmental quality, or changes in leisure, all of
which influence peoples’ economic welfare. However, keeping all other things constant,
the rise in per capita GDP is likely to improve the welfare.

8. Assume a Hyundai dealership in USA bought 30 Hyundai cars from Korea at a

cost of $15,000 per car in September of 2006. By December 31, 2006 they had
sold 20 of the Hyundai cars at a price of $18,000 each. The remaining Hyundai
cars were sold in January of 2007 at a price of $16,000 each. How exactly does
this affect the GDP in the USA in 2006 and 2007, and which categories of GDP
(C, I, G, or NX) are affected?

2006: NX = - (30*15,000) = - 450,000

C = + (20*18,000) = + 360,000
 I = + (10*15,000) = + 150,000
_____________________________
GDP = + 60,000

Check: The value added in 2006 is 20*3,000 = 60,000.

2007: C = + (10*16,000) = + 160,000

I = - (10*15,000) = - 150,000
____________________________
GDP = + 10,000

Check: The value added in 2007 is 10*1,000 = 10,000.

9. Calculate the values for government purchases (G), private domestic saving (S H),
and private domestic investment (I) from the following information (all variables
are in billions of dollars).
national income Y = 5,200 budget deficit BuD = 150
disposable income YD = 4,400 trade deficit TD = 110
consumption C = 4,100

From YD = C + SH ==> SH = YD - C ==>

4,400 - 4,100 = 300.

From SH - I = BuD - TD ==>

300 - I = 150 - 110 ==> I = 260.

From Y = C + I + G + NX ==> G = Y - C - I - NX==>

G = 5,200 - 4,100 - 260 + 110 = 950.

Or

BuD = G + (TR – TA)

150 = G + 800
G = 950