1. After a boat rescues everyone else from Gilligan’s Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows coconuts and catches fish. Last year he harvested 1000 coconuts and caught 500 fish. He values one fish as worth two coconuts. The Professor gave 200 coconuts to Gilligan in exchange for help in the harvest, and he gave Gilligan 100 fish in exchange for collecting worms for use in fishing. The Professor stored 100 of his coconuts in his hut for con- sumption at some future time. Gilligan consumed all his coconuts and fish.
In terms of fish, what is the GDP of Gilligan’s Island? What are consumption and investment? What are the incomes of the Professor and Gilligan?
2. National income and product data are generally re- vised. What effects would the following revisions have on consumption, investment, government purchases, net exports, and GDP?
a. It is discovered that consumers bought $6 billion more furniture than previously thought. This furni- ture was manufactured during the current year in North Carolina.
b. It is discovered that consumers bought $6 billion more furniture than previously thought. This furni- ture was manufactured during the current year in Sweden.
c. It is discovered that businesses bought $6 billion more furniture than previously thought. This furni- ture was manufactured during the current year in North Carolina.
d. It is discovered that businesses bought $6 bil- lion more furniture than previously thought. This
furniture was manufactured during the current year in Sweden.
3. ABC Computer Company has a $20,000,000 factory in Silicon Valley. During the current year ABC builds $2,000,000 worth of computer components. ABC’s costs are labor, $1,000,000; interest on debt, $100,000; and taxes, $200,000.
ABC sells all its output to XYZ Supercomputer. Using ABC’s components, XYZ builds four supercom- puters at a cost of $800,000 each ($500,000 worth of com- ponents, $200,000 in labor costs, and $100,000 in taxes per computer). XYZ has a $30,000,000 factory.
XYZ sells three of the supercomputers for $1,000,000 each. At year’s end, it had not sold the fourth. The unsold computer is carried on XYZ’s books as an $800,000 increase in inventory.
a. Calculate the contributions to GDP of these trans- actions, showing that all three approaches give the same answer.
b. Repeat part (a), but now assume that, in addition to its other costs, ABC paid $500,000 for imported computer chips.
4. For each of the following transactions, determine the contribution to the current year’s GDP. Explain the effects on the product, income, and expenditure accounts.
a. On January 1, you purchase 10 gallons of gasoline at $2.80 per gallon. The gas station purchased the gasoline the previous week at a wholesale price (transportation included) of $2.60 per gallon.
b. Colonel Hogwash purchases a Civil War–era mansion for $1,000,000. The broker’s fee is 6%.
ChAPTEr 2 | The Measurement and Structure of the National Economy 57
c. A homemaker enters the work force, taking a job that will pay $40,000 over the year. The homemaker must pay $16,000 over the year for professional child care services.
d. A Japanese company builds an auto plant in Tennessee for $100,000,000, using only local labor and materials. (Hint: The auto plant is a capital good produced by Americans and purchased by the Japanese.)
e. You are informed that you have won $3,000,000 in the New Jersey State Lottery, to be paid to you, in total, immediately.
f. The New Jersey state government pays you an additional $5000 fee to appear in a TV commercial publicizing the state lottery.
g. Hertz Rent-a-Car replaces its rental fleet by buy- ing $100,000,000 worth of new cars from General Motors. It sells its old fleet to a consortium of used-car dealers for $40,000,000. The consortium resells the used cars to the public for a total of $60,000,000.
5. You are given the following information about an economy:
Gross private domestic investment = 40
Government purchases of goods and services = 30 Gross national product (GNP) = 200
Current account balance = -20 Taxes = 60
Government transfer payments to the domestic private sector = 25
Interest payments from the government to the domestic private sector = 15 (Assume all interest payments by the government go to domestic households.)
Factor income received from rest of world = 7 Factor payments made to rest of world = 9
Find the following, assuming that government invest- ment is zero:
a. Consumption
b. Net exports
c. GDP
d. Net factor payments from abroad
e. Private saving
f. Government saving
g. National saving
6. Consider an economy that produces only three types of fruit: apples, oranges, and bananas. In the base year
(a few years ago), the production and price data were as follows:
Fruit Quantity Price
Apples 3000 bags $2 per bag Bananas 6000 bunches $3 per bunch Oranges 8000 bags $4 per bag
In the current year the production and price data are as follows:
Fruit Quantity Price
Apples 4000 bags $3 per bag Bananas 14,000 bunches $2 per bunch Oranges 32,000 bags $5 per bag
a. Find nominal GDP in the current year and in the base year. What is the percentage increase since the base year?
b. Find real GDP in the current year and in the base year. By what percentage does real GDP increase from the base year to the current year?
c. Find the GDP deflator for the current year and the base year. By what percentage does the price level change from the base year to the current year?
d. Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in prices or increases in the physical volume of output?
7. For the consumer price index values shown, calculate the rate of inflation in each year from 1930 to 1933. What is unusual about this period, relative to recent experience?
Year 1929 1930 1931 1932 1933
CPI 51.3 50.0 45.6 40.9 38.8
8. Hy Marks buys a one-year government bond on January 1, 2012, for $500. He receives principal plus interest totaling $545 on January 1, 2013. Suppose that the CPI is 200 on January 1, 2012, and 214 on January 1, 2013. This increase in prices is more than Hy had anticipated; his guess was that the CPI would be 210 at the beginning of 2013. Find the nominal interest rate, the inflation rate, the real interest rate, Hy’s expected inflation rate, and Hy’s expected real interest rate.
9. The GDP deflator in Econoland is 200 on January 1, 2011. The deflator rises to 242 by January 1, 2013, and to 266.2 by January 1, 2014.
a. What is the annual rate of inflation over the two-year period between January 1, 2011, and
0\(FRQ/DE
Visit www.myeconlab.comto complete these exercises online and get instant feedback. Exercises that update with real-time data are marked with .58 PArT 1 | Introduction
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Visit www.myeconlab.comto complete these exercises online and get instant feedback. Exercises that update with real-time data are marked with . January 1, 2013? In other words, what constantyearly rate of inflation would lead to the price rise observed over those two years?
b. What is the annual rate of inflation over the three- year period from January 1, 2011, to January 1, 2014?
c. In general, if P0 is the price level at the beginning
of an n-year period, and Pn is the price level at the end of that period, show that the annual rate of inflation p over that period satisfies the equation
(1 + p)n = Pn/P
0.