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Tutorial Chapter 2

ECN 3105 MACROECONOMICS 1. Tutorial Chapter 2. Tutorial (2) Review Questions. What are the three approaches to measuring economic activity? Why do they give the same answer?

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Tutorial Chapter 2

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  1. ECN 3105 MACROECONOMICS 1 Tutorial Chapter 2

  2. Tutorial (2) Review Questions • What are the three approaches to measuring economic activity? Why do they give the same answer? • Why are goods and services counted in GDP at market value? Are there any disadvantages or problems in using market values to measure production? • What is the difference between intermediate and final goods and services? In which of these categories do capital goods such as factories and machines, fall? Why is the distinction between intermediate and final goods important for measuring GDP?

  3. Tutorial (2) Review Questions • How does GDP differ from GNP? If a country employs many foreign workers, which is likely to be higher: GDP or GNP? • List the 4 components of total spending. Why are imports subtracted when GDP is calculated in the expenditure approach? • Define private saving. How is private saving used in the economy? What is the relationship between private saving and national saving?

  4. Tutorial (2) Review Questions • What is national wealth, and why is it important? How is national wealth linked to national saving?

  5. Tutorial (2) Numerical Problem • Khairul Computer Company has a RM 20,000,000 factory in Klang Valley. During the current year Khairul builds RM 2,000,000 worth of computer components. Khairul’s costs are such belows: Labor RM 1,000,000 Interest on debt RM 100,000 Taxes RM 200,000 Khairul sells all its output to Rin Supercomputer. Using Khairul’s componenets, Rin builds four supercomputers at cost of RM 800,000 each (RM 500,000 worth of components, RM 200,000 in labor costs and RM 100,000 in taxes per computer). Rin has a RM 30,000,000 factory. Rin sells three of the supercomputers for RM 1,000,000 each. At year’s end, it had not sold the fourth. The unsold computer is carried on Rin’s books as an RM 800,000 increase in inventory. Calculate the contributions to GDP of these transactions, showing that all three approaches give the same answer.

  6. Tutorial (2) Numerical Problem • For each of the following transactions, determine the contribution to the current year’s GDP. Explain the effects on the product, income and expenditure approaches a) On January 1, you purchase 10 gallons of gasoline at RM 2.80 per gallon. The gas station purchased the gasoline the previous week at a wholesale price (transportation included) of RM 2.60 per gallon. b) You are informed that you have won RM 3,000,000 in the Genting Highland Lottery, to be paid to you in total, immediately. c) The Petronas pays you an additional RM 5,000 fee to appear in a TV commercial publicizing the Petronas Mesra Card Gift

  7. Tutorial (2) Numerical Problem 3. 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 Factor income received from rest of world = 7 Factor payments made to rest of world = 9

  8. Tutorial (2) Numerical Problem Find the following, assuming that government investment is zero: • Consumption • Net exports • GDP • Net factor payments from abroad • Private saving • Government saving • National saving

  9. Tutorial (2) Numerical Problem 4) Consider an economy that produces only three types of fruit: apples, oranges and bananas. In the base year (a few years ago) and current year, the production and price data were as follows:

  10. Tutorial (2) Numerical Problem • Find nominal GDP in the current year and in the base year. What is the percentage increase since the base year? • Find real GDP in the current year and in the base year. By what percentages does real GDP increase from the base year to the current year? • Find the GDP deflator for the current year and the base year. By what percentages does the price level change from the base year to the current year? • Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in price or increase in the physical volume of output?

  11. Tutorial (2) Numerical Problem 5) For the consumer price index values shown, calculate the rate of inflation in each year from 2004 to 2008. What is unusual about this period, relative to recent experience?

  12. Tutorial (2) Numerical Problem 6) Fergie Marks buys a one-year government bond on January 1, 2007 for RM 500. She receives principal plus interest totaling RM 545 on January 2008. Suppose that the CPI is 200 on January 1, 2007 and 214 on January 1, 2008. This increase in prices is more than Fergie had anticipated; her guess was that the CPI would be at 210 by the beginning of 2008. Find the nominal interest rate, the inflation rate, the real interest rate, Fergie’s expected inflation rate and Fergie’s expected real interest rate.

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