Chapter 6 Problem Set

Chapter 6 Problem Set - 1. In the following situations, explain what is counted in this year's GDP: (a) You bought a new Wii at GameStop last year and resold it on eBay this year. When you bought the new Wii last year, the market value of the Wii was included in last year's GDP. However, when you sold it on eBay-even though it was sold this year-it is not included in this year's GDP. This is because GDP only includes new, not used, _nal goods and services. On the other hand, the value of the service that eBay provides would be counted in GDP. (b) You purchase an Investing for Dummies book at Barnes & Noble. Because you purchased the Investing for Dummies book new, this should be included in GDP. (c) You purchase a historic home using the services of a real estate agent. The value of the home is not included in GDP because it is \historic" and therefore used. However, the value of the real-estate agent's services is included in GDP. (d) You detail your car so it is spotless inside and out. This is not included in GDP because it is non-market production. Though you have provided yourself with a service, no one was paid for this service. Recall that GDP = income. In this case, because no one earns any additional income when you detail your car, it is not included in GDP. (e) You purchase a new hard drive for your old laptop. The market value of the hard drive is included in GDP, but the value of your old laptop is not. The value of your laptop was included in GDP when you bought it new. (f) Your physical therapist receives $300 for physical therapy but reports only $100. If your therapist just reports $100, only that $100 is included in GDP. Because your therapist does not report the remaining $200, it is part of the underground economy, which is not included in GDP. (g) Apple buys 1,000 motherboards for use in making new computers. The motherboards are not included in GDP because they are an intermediate good. Apple is not selling the motherboards directly to consumers; the company is combining them with other parts to build whole computers, which they will then sell to consumers. The value of the computers (that contain the motherboards) will be included in GDP. (h) Toyota produces 10,000 new Camrys that remain unsold at the end of the year. Toyota produced 10,000 new Camrys that remain unsold at the end of the year. Though the Camrys are still on car dealers' lots, they are still included in GDP as inventory. Inventories are a stock of goods that businesses can use to produce their product in the future, and in this case, the unused Camrys are part of Toyota's inventory. 2. To which component of GDP expenditure (C, I, G, or NX) does each of the following belong? (a) Swiss chocolates imported from Europe. Swiss chocolates that are imported from Europe should be included in NX, because they are imports. (b) A driver’s license you receive from the Department of Motor Vehicles. The value of the driver's license should be included in G. Because the government used resources to produce this license, (c) A candle you buy at a local store. The candle you buy at a local store should be included in C. You buy the candle for your personal consumption. (d) A new home. A new home should be included in I. 3. Fill in the missing data in the following table. 4. Consider an economy that only produces two goods: strawberries and cream. Use the table below to compute nominal GDP, real GDP, and the GDP for each year. (Year 2010 is the base year, or in other words, use 2010 prices to calculate real GDP.) For 2010: nominal GDP2010 = ($3:00 _ 100) + ($2:00 _ 200) = $700 For 2011: nominal GDP2011 = ($4:00 _ 125) + ($2:50 _ 400) = $1; 500 For 2012: nominal GDP2012 = ($5:00 _ 150) + ($3:00 _ 500) = $2; 250 For 2010: real GDP2010 = ($3:00 _ 100) + ($2:00 _ 200) = $700 For 2011: real GDP2011 = ($3:00 _ 125) + ($2:00 _ 400) = $1; 175 For 2012: real GDP2012 = ($3:00 _ 150) + ($2:00 _ 500) = $1; 450 For 2011: GDP deator2011 = ($1; 500 _ $1; 175) _ 100 = 127:7 For 2012: GDP deator2012 = ($2; 250 _ $1; 450) _ 100 = 155:2