Q1

Q2

1. Normative (should raise interest rates)
2. Positive (just analysis, no judgement)
3. Positive (not indicating a should action, but a should result)
4. Positive (just analysis, no judgement)

Q3

1. GDP is the market value of final goods and services newly produced within a nation during a fixed period of time.

GNP is the market value of final goods and services produced by domestic factors of production during a fixed period

So GDP doesn’t include the market value of final goods and services produced by domestic factors of production during a fixed period (i.e. musicians from home playing in foreign), while GNP does. GNP doesn't include final goods and services produced in domestic country by foreign factors of production i.e. foreign surveyors at home), while GDP does.

Example: $20 worth of gizmos produced by domestic factors in home

$10 worth of widgets produced by domestic factors in foreign

$11 worth of yodels produced by foreigners in home

GDP=$31, GNP=$30

2. Measured GDP might underestimate aggregate production because of the following reasons:

i – Some goods and services aren't sold in formal markets (so they aren't included in the measure of market value of final goods and services, GDP or GNP)

e.g. home making and child care services are often provided free of cost

or pollution reduction such as community clean ups provided free of cost

ii – some goods and services are bought and sold on black or underground markets (so although they have a market value, they aren’t included in the formal measures GDP or GNP)

e.g. drug sales, prostitution and other market activities that are not permitted by some nations

or under the counter work that is not reported to the government in order to avoid taxes.

iii – some goods and services don’t have a correct market value attached because they are provided by the government as public goods and services, so the proxy value that is attached to these goods and services is the cost of providing them, not the actual service that is provided

e.g. national defense, education, police force, etc. So we may improve the value of National Defense provided by the government by introducing new mass destruction weapons, but these weapons result in less necessity to keep and pay a large standing army. Therefore, the cost of defense has gone down, but the value of the defense services we receive has gone up (won’t be accurately measured if we only have cost as a proxy in GDP)

3. True

Q4

GNP = Hay production + Banjo Playing = 15K + 7K = 22K

GDP = Hay production + Banjo Playing at Home only = 15K + 5K = 20K

NX = Exports-Imports = 4K-6K = -2k

(note: Banjo playing abroad is not a part of GDP (not domestically produced) and is therefore not an export. See the text book solution from the library if you are still confused)

Q5

1. GDP at market prices:

   Expenditure Approach:

   +Consumer Expenditure = 65K

   +Investment = 25K

   +Government Expenditure = 20K

   +Exports-Imports = 25K-16K

   =GDP = $119K

   Income Approach:

   Net national income = total income generated in the production process

   = wages and salaries + after tax profits + interest income + rent

   = net domestic income here because NFP is zero

   Gross domestic product (GDP) = net domestic income + indirect taxes + depreciation

   [Note: total profits = dividends + retained earnings + taxes paid by firm (these are indirect taxes)]

   so Net domestic income =

   +Wages paid to labour = 80K

   +Total profits of firms = 20K

   +Interest earned by households = 10K

   +Rent received by households = 4K

   = net domestic product = $114K

   +Depreciation = 5K

   =GDP = $119K

2. GDP at factor cost (refers to before tax prices)

   GDP at factor cost = GDP at market prices - indirect taxes (taxes paid by firms) + subsidies

   = $119K - $5K + $0K = $114K

   Personal Disposable income = Y + NFP + TR + INT – T

   (here Y is GDP, TR is transfers, INT is interest on government loans, and T is taxes paid by households)

   so Personal Disposable income= $119K + $0K + $5K + $0K – $20K = $104K

    

   National Savings: S = I +NX + NFP

   so National Savings= $25K + $9K + $0K = $34K

Q6

1. Fixed-Weight Price Index

   =

   (Base year production at Current prices)
(Base year production at Base year prices)

 

FWPI’98 = ((10*1,000) + (2*10,000))/ ((10*1,000) + (2*10,000)) = 1

FWPI’99 = ((12*1,000) + (2.5*10,000))/ ((10*1,000) + (2*10,000)) = 1.23

Inflation = 23%

Percentage Change in real output using this index

=

Real GDP’99 – Real GDP’98 x100

Real GDP’98

 

=

(Nominal GDP’99)/1.23 – Nominal GDP’98 x100

Nominal GDP’98

 

= -3.79%

 

Variable-Weight Price Index

=

(Current output at Current Prices)

(Current output at Base Yr Prices)

VWPI’98 = 1

VWPI’99 = 1.22

Inflation = 22%

Percentage Change in real output using this index

=