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BGIE Exercise Solutions BGIE Math and NIPA

BGIE Exercise Solutions BGIE Math and NIPA. Jan 21/22, 2001. Real vs. Nominal #1. Bob’s salary increased from $50k to $60k, and price levels increased 10% this year. What was the real and the nominal increase in Bob’s salary? Nominal Increase:

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BGIE Exercise Solutions BGIE Math and NIPA

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  1. BGIE Exercise SolutionsBGIE Math and NIPA Jan 21/22, 2001

  2. Real vs. Nominal #1 • Bob’s salary increased from $50k to $60k, and price levels increased 10% this year. • What was the real and the nominal increase in Bob’s salary? Nominal Increase: ( Year 2 Earnings / Year 1 Earnings – 1 ) = Growth ( $60k / $50k – 1 ) = 20% increase Real Increase: Price Level in Year 1 = 100 Price Level in Year 2 = 110 (remember, 10% increase) Real Salary in Year 2 = Nominal Salary in Year 2 * (Prices Base Year (Year 1) / Prices Year 2) Real Salary in Year 2 = 60 * ( 100 / 110 ) = $54.5k in Year 1 Dollars ( Year 2 Earnings / Year 1 Earnings – 1 ) = Growth ( $54.5k / $50k – 1 ) = 9% real increase

  3. Real vs. Nominal #2 2. Company X’s sales in 1982 were $50m, in 1992 they were $100m. The price index for 1982 was 70.2, and the price index for 1992 was 100. • How did Company X’s sales change in real and nominal terms? Nominal Terms: $100m - $50m = $50m increase $50m / $50m = 100% increase – they doubled! Real Terms: Price Level in 1992 = 100 Price Level in 1982 = 70.2 Convert all earnings to 1992 dollars: Earnings in 1992 Dollars = Nominal Earnings in Year X * (Prices Base Year (1992) / Prices Year X) 1992 Earnings = $100m (nominal earnings) * ( 100 / 100 ) = $100m * 1 = $100m 1982 Earnings = $50m (nominal earnings) * (100 / 70.2 ) = $50m * 1.42 = $71.2m in 1992 dollars ( 1992 Earnings / 1982 Earnings – 1 ) = Growth ( $100m / $71.2m – 1 ) = 40.4% - not bad, but not doubling

  4. Real vs. Nominal #3 3. Nominal U.S. GNP in 1929 was $103.1b, in 1930 it was $90.4b. The price level in 1929 was 50.6, in 1930 it was 49.3, and in 1958 it was 100. • How did US GNP change in real terms between 1929 and 1930? Convert everything into comparable (constant) prices – use 1929 prices Real = Nominal x (base year prices / current prices) 1929 GNP (in 1929 US$) = 103.1 x ( 50.6 / 50.6 ) = $103.1b 1930 GNP (in 1929 US$) = 90.4 x (50.6 / 49.3 ) = $92.8b ( 92.8b / 103.1b – 1 ) = -10.0%

  5. NIPA Solutions • McDonald’s buys ground beef. • This in an intermediate good – it will be made into a finished product. Therefore, it is not counted in the income accounts. • McDonald’s sells a hamburger. • This is a sale of a final good. It is consumption ( C ). • James buys a crappy used car. • A used car is an existing asset, not new production. Hence, this is a transfer of existing assets, and is not counted in the income accounts. • Ted buys a spanking new car. • This car is a newly created asset, so Ted’s purchase is considered consumption ( C ). • Hilton outfits a new hotel kitchen with dishwashers. • Since these are capital goods that will be used for the production of other outputs, and not simply consumed (like a raw material, for example), they are treated as investment ( I ). • James buys a dishwasher for his apartment. • Even though the dishwasher is a consumer durable, and might seem like a capital good, it is treated as consumption ( C ) when purchased by a consumer. The rationale is that James will not be using the dishwasher to create additional value or goods. The only exception to this rule is residential construction – if James purchases a newly-built house, that counts as investment.

  6. NIPA Solutions - Continued • The U.S. government pays Bechtel for building a new dam. • The government is purchasing goods, so it is treated as government spending, ( G ). • The U.S. government sends my grandparents a Social Security check. • This is a transfer payment, not a purchase of goods and services, so it does not appear in the accounts. • James finally sells his Ventro stock (to Ted). • This is an asset transfer, so it does not appear in the accounts. • Ted gives James a lift to the airport. • This is not a market transaction (i.e. no money changes hands), so it does not appear in the accounts. • James takes a taxi to the airport. • This is a market transaction (assuming James actually pays the cab driver), so it does appear in the accounts as consumption ( C ). • McDonald’s buys a new inventory tracking system from Oracle. • Until recently, this would have been considered an intermediate good, and hence not appear. Now, however, software is considered business investment, much like plants or machinery, so this would appear as investment ( I ).

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