Problem Sets 1

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School

Michigan State University *

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302

Subject

Economics

Date

Apr 3, 2024

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docx

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Uploaded by davistat

Intermediate Macroeconomics, 302 Problem Set 1 Most of the problems will be given from the textbook. N and A stand for numerical and analytical correspondingly. N2.4. 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. • Product approach : Gas station's value added ($0.20 x 10 gallons) = $2. Income approach : Gas stations profit = $.20 x 10 gallons = $2. Expenditure approach : Expenditure on final good by consumers ($28) + Investment (Inventory change of -$20) = $2 b. Colonel Hogwash purchases a Civil War–era mansion for $1,000,000. The broker’s fee is 6%. • Product approach : $60,000 broker's fee for providing brokerage services. Income approach: $60,000 income to the broker for wages, profits, etc. Expenditure approach: $60,000 counts as residential investment made by the homebuyer. The important point here is that the transfer of an existing good, even at a higher value than that at which it was originally sold, does not add to GDP. c. A homemaker enters the workforce, taking a job that will pay $40,000 over the year. The homemaker must pay $16,000 over the year for professional childcare services.

• Product approach: $40,000 + $16,000 = $56,000. Income approach: $56,000 ($40,000 compensation of homemaker + $16,000 income to the factors producing the childcare: employees' wages, interest, taxes, and profits) Expenditure approach: $56,000 ($16,000 consumption spending on childcare services + $40,000 in categories that depend on what the homemaker spends his or her income). 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.) • Product approach: $100 million of a capital good. Since it is produced with local labor and materials, and assuming no payments go to Japanese factors of production, this is all added to U.S. GDP. Income approach: $100 million paid to U.S. factors of production Expenditure approach: $100 million net exports, since the plant is owned by the Japanese. (It is not part of gross domestic investment because the plant is not a capital good owned by U.S. residents.) 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. • Product approach: $0 because nothing is produced. Income approach: $0, because this is not a payment to a factor of production, just a transfer. Expenditure approach : $0 because this is a transfer, not a government purchase of goods or services. f. The New Jersey state government pays you an additional $5000 fee to appear in a TV commercial publicizing the state lottery. • Product approach: $5,000 worth of advertising services.

Income approach: $5,000 compensation of employees. Expenditure approach: $5,000 of government purchases. g. Hertz Rent-a-Car replaces its rental fleet by buying $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. a. Product approach: $120 million composed of $100 million of new cars produced plus $20 million of sales services provided by the consortium ($60 million sales price minus $40 million cost). Income approach: $100 million to the factors of production of GM plus $20 million in payments to the factors of production and profits for the consortium. b. Expenditure approach: $100 million by Hertz as investment plus $60 million by the public for consumption of the used cars minus $40 million of investment goods sold by Hertz, for a total of $120 million. N2.5. 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.)

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