Solutions to Problems
Solutions to Problems
Chapter 21
1. Mary's initial capital stock is 5 copiers, depreciation is 1 copier per year, gross investment is 3 copiers, net investment is 2 copiers, and the final capital stock is 7 copiers.
Final capital stock equals initial capital stock plus net investment. Net investment equals gross investment minus depreciation.
3a. Ecoland's GDP is $1,100b.
Expenditure approach:
GDP = C + I + G + X ( M
= $600+ $250+ $200 + $300( $250
= $1,100b.
Income approach:
GDP = wages + gross operating surplus (profits) + taxes ( subsidies
= $700+ $200+ $250 ( $50
= $1,100b.
3b. Either approach can be used.
3c. Injections equal leakages.
Injections = I + G + X
= $250 + $200 + $300
= $750b.
Leakages = S + T + M
= $300 + $200 + $250
= $750b.
5a. Aggregate expenditure is $60 million.
In the figure, B is consumption expenditure, D is investment, C is government expenditures, and E is net exports
AE = C + I + G + X ( M
= $30 + $15 + $12 + $3
= $60m.
5b. Aggregate income is $60 million.
Aggregate income equals aggregate expenditure, which from 5a is $60 million.
5c. GDP is $60 million.
GDP equals aggregate expenditure, which from 5a is $60 million.
5d. Government budget deficit is $2 million.
C is government expenditures, and A is taxes. So the government budget deficit equals
Government budget deficit = G ( T.
=$12 ( $10
= $2m.
5e. Household saving is $20 million.
In the figure, B is consumption expenditure and A is taxes.
S = Y ( C ( T
= $60 ( $30 ( $10
= $20m
5f. Government saving is minus $2 million.
In the figure, A is taxes and C is government expenditures.
Government saving = T ( G
= $10 ( $12
= $2m
5g. Foreign borrowing is $3 million.
In the figure, E is net exports
Foreign borrowing = X ( M
= $3m
Lotus Island is in surplus, so foreigners are in deficit and they must borrow from Lotus Island to pay for their deficit. Foreign borrowing equals $3 million.
5h. National saving is $18 million.
National saving equals the sum of household saving and government saving. Household saving is $20 million (see answer 5e). Government saving is minus $2 million (see answer 5f).
National saving = S + (T ( G)
= $20 + ($2
= $18m
7. Value added is the value of Big Biscuit's output less the cost of intermediate products bought from other firms. In this case:
Value of sales or output ($1.50 x 200) $300
Cost of materials:
Eggs $100
Flour 50
Milk 45
Utilities 10
Total 205
Value added 95
So, value added is ($95÷200), or 47.5 cents per biscuit.
9 The basket used in the CPI is 10 bottles of juice, 15 bananas and 5 lengths of cloth.
The basket used in the CPI is the typical basket consumed in the base year. In the base year, the typical family spends $40 on juice @ $4 a bottle, so the family buys 10 bottles of juice; $45 on bananas @ $3 a kilogram, so the family buys 15 kilograms of bananas; and $25 on cloth @ $5 a metre, so the family buys 5 metres of cloth (see table 1).
|Table 1 ( Problem 9 |
|Sandy Island |
| |apple juice |bananas |cloth | |
|Year |
|Year |Real GDP |Nominal GDP |GDPdef |
| |(billions of dollars) |(billions of dollars) | |
|2000 |1,000 |1,000 |100.00 |
|2001 |1,050 |1,200 |114.28 |
|2002 |1,200 |1,500 |125.00 |
11a. In 2001, GDPdeflator = 114.28.
11b. In 2002, GDPdeflator = 125.00.
11c. Inflation between 2001 and 2002 was 9.38 per cent.
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11d. And the inflation rate between 2000 and 2002 was 25 per cent.
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