1 / 22

examples of problems

examples of problems. The difference between the expenditure and income approaches to GDP . Calculating G DP ( expenditure approach ). GDP = C + G + I + ( E X - I M) In this case : C = $ 10.003 G  = $ 2.798  I  = $ 2.056  ( E X - I M)  = - $ 706 Therefore:

dory
Download Presentation

examples of problems

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. examples of problems

  2. The difference between the expenditure and income approaches to GDP 

  3. CalculatingGDP (expenditure approach) GDP = C + G + I + (EX - IM) In this case: C = $10.003G = $2.798 I = $2.056 (EX - IM) = -$706Therefore: • GDP = $ 10.003 + $ 2.798 + $ 2.056+(-$ 706) • GDP = $14.151

  4. CalculatingGDP (income approach) • Compensations of employees +  • Rentalincome + Interest income + Profits +Indirect Business Taxes + Depreciation • GDP = $14.151 Therefore:GDP = $8.037 + $1.072 + $915 + $39+$1.195 +$1.071+ $1.778 + $44

  5. Calculating GNP, NDP, NNP and National Income Net Domestic Product = GDP – Depreciation NDP= $ 14.151 - $1.778 = $ 12.373 GrossNational Product = GDP + NFIA Net Factor Income from Abroad = Receipts of factor income from the rest of the World – Payments of factor income to the rest of the World GNP = $ 14.151 + $145 = $ 14.296 Net National Product= GNP – Depreciation NNP = $ 14.296 – $1.778 = $ 12.518 National Income = NNP- indirect taxes NI = $ 12.518 - $1.071 = $11.447

  6. Measuring Nominal and Real GDP Calculating Real GDP • Table (a) shows the quantities produced and the prices in 2000 (the base year). • Nominal GDP in 2000 is $100 million. • Because 2000 is the base year, real GDP and nominal GDP both are $100 million.

  7. Measuring Nominal and Real GDP • Table (b) shows the quantities produced and the prices in 2009. • Nominal GDP in 2009 is $300 million. • Nominal GDP in 2009 is three times its value in 2000.

  8. Measuring Nominal and Real GDP • In Table (c), we calculate real GDP in 2009. • The quantities are those of 2009, as in part (b). • The prices are those in the base year (2000) as in part (a). • The sum of these expenditures is real GDP in 2009, which is $160 million. GDP Deflator= (Nominal GDP/Real GDP)100 GDP Deflator = ($ 300/ $ 160)100 = %187.5

  9. Calculating the CPI and the Inflation Rate

  10. Measuring Unemployment The Bureau of Statistics conducts a monthly survey to estimate the unemploymentrate. Respondents’ answers are used to estimate the number of people who are employed,unemployed, and in the labor force. a. Calculate the unemployment rate. b. Calculate the unemployment rate taking into account discouraged workers. a. Unemployment rate= 12,036/(99,093 + 12,036) = 10.83% b. (12,036 + 1,849)/(99,093 + 12,036 + 1,849) = 12.29%

  11. Measuring Unemployment Use the information in the figure to calculatethe unemployment rate and the labor force participation rate.

  12. Quantity theory of money and Fisher effect Suppose that the velocity of moneyVisconstant, the money supply M is growing 5% per year, real GDP Y is growing at2% per year, and the real interest rate is r = 4%. Assume that π=πe, meaning theex-post inflation rate is always equal to the expected inflation rate. a) Find the value of the nominal interest rate i in this economy; b) If the central bank increases the money growth rate by 2% per year, find thechange in the nominal interest rate ∆i; c)Suppose the growth rate of Y falls to 1% per year. • What will happen to ? • What must the Central Bank do if it wishes to keep constant?

  13. Quantity theory of money and Fisher effect (solution) • First, find . = 5  2 = 3 %. Then, find i = r +  = 4 + 3 = 7 %. • i = 2, because, according to the quantity theory, changes in the money growth rate will translate in a one-to-one change in the inflation rate. Therefore, a change of 2% in the growth rate will simply change the inflation rate by 2%, leaving the real interest rate unchanged. Therefore, the change in the nominal interest rate is the same as the change in inflation, therefore ∆ i = 2%. c. If the Central Bank does nothing,  = 1. Because, If the Y falls by 1% (so it grows a -1%) a year, while everything else isconstant, the inflation rate will increase by 1% every year. To prevent inflation from rising, Central Bankmust reduce the money growth rate by 1 percentage point per year.

  14. Money demand and Fisher effect Suppose that the money demand in an economy is given by the following linear function: Suppose that P=100, Y=1000 and i=0.1. Determine the demand for realbalances and the velocity of money in this economy; Suppose that now P=200 while everything else remains unchanged. Determinethe new demand for real balances and the new velocity in this economy.

  15. Money demand and Fisher effect (solution) a) Given the data in the problem we have: and total money supply is: M = 600 x 100 = 60000 The velocity of money according the quantity theory is given by: b)Now the price doubles. However, we assume that everything else remains unchanged, meaning that the real Income and the nominal interest rate do not change.In this case the demand for real balance must be the same since nothing has changed apart the prices: In this case the total money supply simply has double as well: M = 600 x 200 = 120000, and

  16. Keynesian Cross Consider the Keynesian cross model and assume that the consumption function is given by: C = 200 + 0.75(Y - T) I=100, G=100; T=100. Graph planned expenditure as a function of income; Find the equilibrium level of income; If government purchases increase to 125, find the new equilibrium level of income; Calculate multiplier of G.

  17. Keynesian Cross (solution) 1. The planned expenditure is: E=C+I+G E = 200 + 0.75Y - 75 +100 +100 = 325 + 0.75Y

  18. Keynesian Cross (solution) 2. Y=E Y=325+0.75 Y Y=1300 3. Now the planned expenditure is given by: E = 350 + 0.75Y The new equilibrium level: Y=350+0.75 Y Y=1400 4. The multiplier of G is defined as , where MPC=marginal propensity to consume. G has increased by 25 and this leads to an increase in Y of 100. This is the essence of the government expenditure multiplier effect. In particular this implies that the multiplier of G is equal to 4.

  19. IS-LM and Crowding Out Consider the following IS-LM model: C = 100 + 0.5(Y - T) , I = 100 -10r , G = T = 50 M/P=100Y – 50r, where M = 1000 and P = 5; a) Find the IS curve and the LM curve and solve for the equilibrium levels of realincome and the interest rate; b) Suppose that government expenditure increases by 50, find the newequilibrium values for Y and r. Calculate the level of Crowding Out.

  20. IS-LM and Crowding Out (solution) a) The IS curve: Y=C+I+G Y=100+0,5 (Y-T)+100-10r+50 Y=100+0,5 Y-(0,5x50)+100-10r+50 Y=100+0,5 Y-25+100-10r+50 10r=225-0,5Y R=22,5-0,05Y The LM curve: M/P=(M/P)d 1000/5=100Y-50r 200-100Y=-50r 50r=100Y-200 r= 100Y/50-200/50 r = 2Y – 4 Equilibrium: 22,5-0,05Y=2Y-4 22,5+4=2Y+0,05Y 26,5=2,05Y Y=12,9 ; r=2x12,9-4=21,8

  21. IS-LM and Crowding Out (solution) b) G=100 Y=C+I+G Y=100+0,5 (Y-T)+100-10r+100 10r=275-0,5Y R=27,5-0,05Y The LM curve: M/P=(M/P)d 1000/5=100Y-50r 200-100Y=-50r 50r=100Y-200 r= 100Y/50-200/50 r = 2Y – 4 Equilibrium: 27,5-0,05Y=2Y-4 27,5+4=2Y+0,05Y 31,5=2,05Y Y=15,4 ; r=2x15,4-4=26,8

  22. IS-LM and Crowding Out (solution) The Crowding out is measured as the difference between the level of incomeweobtain after the change in G if there was no increase in the interest rate. In practice is the level of income implied by the government expenditure multiplier inthe Keynesian Cross. ∆Y=(1/1-MPC)∆G=∆G/1-MPC G1=50 G2=100 ∆Y=50/1-0,5=100 The initial equilibrium (before the change in G) was Y = 12.9. After the change in G, if there is not interest rate effect, the new income should beY = 12.9 +100 = 112.9 The new equilibrium however, when there is an interest rate effect is Y=15.4. Meaning that the level of Crowding out is: CO = 112.9 -15.4 = 97.5 This means that given our model specification, most of the change in G will crowdingout private investment through the increase in the real interest rate and so fiscal policyis not really effective in this case.

More Related