DEPERTMENT OF ECONOMICSUNIVERSITY OF KARACHI

ASSIGNMENT # 1 (MACRO-ECONOMICS)B.S (2ND Year)

DR. KHALID MUSTAFA

Answer the following questions:

1. Suppose police become more efficient and we hire fewer police officers. What

will happen to GDP?

2. Assume a product improves in quality from one year to the net year and its

price rises to reflect this improvement. What happens to the GDP deflator and

real GDP?

3. Do increases in unwanted inventories on firm’s shelves count as inventory

investment in GDP account?

4. Is buying an air-conditioner an act of consumption or investment in the GDP

accounts? What about purchase of a house?

5. What happens to a GDP account when a Pakistani firm decides to build a plant

in Dubai rather than in Pakistan?

6. How would an increase in a sales tax affect GDP?

7. If your friend urges you to purchase stock options, is he encouraging you to

invest in the sense in which we use the term in the GDP account?

8. Is domestic investment the same as investment done in Pakistan?

9. What is difference in the National Income accounts if a firm purchases a car

for an executive and the firm pays the executive an additional income to

purchase a car?

Ans.

10. State bank of Pakistan has taken expansionary monetary policy by declining

interest rate from 13% to 12.5%. Show the effect of this policy on GDP,

Employment, inflation and foreign sector.

11. Explain why intermediate goods and services generally are not included

directly in GDP are there any circumstances under which they would be

included directly?

A. They are not produced

B. They do not have a market value

C. They are imported and not produced locally

D. To do so would result in their market value being included more than

once

B.

12. Suppose that a woman marries her servant. After they are married, her

husband continues to wait in her as before. And she continues to support him

as before (but as a husband rather than as a wage earner). How do you think

the marriage affects GDP? How would it affect GDP?

13. Suppose that virtually every one In Pakistan decides to take life a little, and

the length of the average work increases by 25%. How will it affect GDP?

14. What are goods and services counted in GDP at market price. Is there any

disadvantage in using market price to measure productions?

15. Assume an economy produced only two goods, computer and television sets in

2008 and 2009. It produces 100 computers in 2008 at a price of $1000 and 200

computers in 2009 at a price of $500. It produces 1000 television sets in 2008

at a price of $500and 800 television sets in 2009 at a price of $600. Compare

nominal GDP, Real GDP, GDP deflator, CPI and Inflation.

16. Given the following information:

GDP = Rs.2400 National Income = Rs.1925IG (gross Investment) = Rs.400 Wages & salaries = Rs.1460IN (Net Investment) = Rs.150 Dividends = Rs.50Consumption = Rs.1500 Net Interest = Rs.60Government purchase of goods and services = Rs.480Government budget surplus = Rs.15Proprietors income plus rental income = Rs.160Personal interest income = Rs.190Social insurance contributions = Rs.190Personal tax and non-tax payments = Rs.300Government and business transfer to person = Rs.260Interest paid by the consumer & transfer to foreigners = Rs.45

Calculate:

i. Depreciation

ii. Net exportiii. Indirect taxesiv. Corporate profitv. Personal incomevi. Government taxes-transfer paymentsvii. Disposable incomeviii. Personal saving

vii. Disposable income = GDP – Tax + Gov transfer feesvii. 2400 – 300 + 260=Rs.2360

viii. Personal Saving = Disposable income – Consumptionviii. 2360 – 1500 =Rs. 860

Ques1.  Suppose police become more efficient and we hire fewer police officers. What will happen to GDP ?

Ans.GDP will decrease because, GDP is considered with the Quantity not with the Quality. Therefore Less service provided, cause less output, so GDP goes down.

Ques2. Assume a product improves in quality from one year to the net year and

its price rises to reflect this improvement. What happens to the GDP deflator

and real GDP?

Ques3. Do increases in unwanted inventories on firm’s shelves count as

inventory investment in GDP account?

Ques4. Is buying an air-condition (A/C) an act of consumption or investment in the GDP accounts ? What about purchase of a house ?

Ans. Buying an Air Conditioner for a house I which a person wants to live will be a consumption, but for a firm or for any any commercial purpose it will be the investment in GDP’s account.

Ques5. What happens to GDP accounts if an American firm decides to build a plant in England rather than the U.S. ?

Ans. If an American firm decides to build a plant in England, then the GDP of England will increase (depends on material and services they are getting from). And for Americans it will be there GNP increase.

Ques6. How would an increase in a sales tax affect GDP?

Ques7. If your friend urges you to purchase stock options, is he encouraging

you to invest in the sense in which we use the term in the GDP account?

Ques8. Is domestic investment the same as investment done in any other country ?

Ans. No, Domestic Investment is different rather than investment in other country.

Consumption (C) 300 Investment (I) 50 Government purchases (G) 70 Government transfer payments (TP) 15 Taxes (T) 75 Exports (X) 10 Imports (M) 5

To find Disposable Income (DI) you first need to find your GDP (Y).Y= C + I + G + (X-M) Y = 300 + 50+ 5 + 70Y=425

So the formula for DI ( Gross Income - Taxes + Transfer Payments) is DI = Y - T + TPDI = 425 - 75 + 15DI = 365

From that you can find savings (Whatever is not consumed is saved)S= DI - CS = 365 - 300S = 65

1.  Suppose police become more efficient and we hire fewer police officers. What will happen to GDP ?

      GDP goes down.  Less service provided, less output, lower GDP.

Ans.GDP will decrease because, GDP is considered with the Quantity not with the Quality. Therefore Less service provided, cause less output, so GDP goes down.

2.  Assume a product improves in quality from one year to the next year and its price rises to reflect this improvement. What happens to the GDP deflator and Real GDP ?

     Quality isn't measured in the GDP.  Only price and quantity.  If price goes up for the same quantity, GDP goes up.  But real GDP is measured by a base price.  The base price doesn't change so real GDP remains the same.   That means the GDP deflater goes whatever way it's gotta go so Nominal GDP is higher than Real GDP in the later year.  Sorry, to lazy to look it up.

3. Do increases in unwanted inventories on firm's shelves count as inventory investment in GDP account ?

   My text says yes.  Additions to finished good inventories are included as investments.  That makes sense because we're trying to measure this years output.  And they didn't get into sales.

The question is,what do we do with inventory from last year that got sold this year.  Can't count it twice so it must be subtracted from the years sales or just not included in the sales.

4. Is buying an air-condition (A/C) an act of consumption or investment in the GDP accounts ? What about purchase of a house ?

   I'm going this way, buying an air conditioner for a plant is an investment.  Buying a newly build house is an investment for GDP.  So,what about buying an air conditioner for an old house?  I'm going with a consumer purchase but that's just a guess.

Ans. Buying an Air Conditioner for a house I which a person wants to live will be a consumption, but for a firm or for any any commercial purpose it will be the investment in GDP’s account.

Purchasing a house

5. What happens to GDP accounts if an American firm decides to build a plant in England rather than the U.S. ?

    Depends on who they purchase the materials from.  I would have to say that it isn't included in US GDP.  It only makes sense as GDP is intended to measure the nations

productivity.  The plant build in England would be build by labor and materials in England.  If the materials were being purchase in the US and shipped to England, they would be exports.

Ans. If an American firm decides to build a plant in England, then the GDP of England will increase (depends on material and services they are getting from). And for Americans it will be there GNP increase.

6. How would an increase in a sales tax affect GDP ?

     I don't think sales taxes are included in the price of the goods for GDP calculations.  No effect then.

7. If your friend urges you to purchase stock options, is he encouraging you to invest in the sense in which we use the term in the GDP account ?

    No, investment in GDP terms is not the same as investment in business terms.  In GDP terms, it is the purchase of buildings and equipment used to produce the product but not actually part of the final product. 

8. Is domestic investment the same as investment done in any other country ?

      Again, I have to go back to the fundamental purpose of what GDP measures. It measures the value added by the national economy in the production of final goods and services.  An economic investment in plant and equipment in a foreign country wouldn't be value added by the national economy.  So it would not be the same.

Ans. No, Domestic Investment is different rather than investment in other country, because

9. What is difference in the national income accounts between

A firm's purchasing a car for an executive and the firm's paying the executive additional income to purchase a car ?

                 A firm purchasing a car for an executive would be a GDP investment in equipment.  AN increase in salary for a bonus or for the executive to buy a car would not be included in GDP.  When the executive buys the car, then the sale would be included in GDP under consumption.

You're hiring your spouse ( who takes care of the house ) rather than just having her do the work

            That is, in fact, one of the points of what GDP fails to measure.

            But I run into a problem.  So I have to think this out.

            Does labor expenses by a company get included in GDP?  Is it simply included in the price of the final product and therefore measured by including the final product sales.  The answer to this is yes.

           If I higher any one to clean my house, is that included as consumption in GDP?  My text says that getting my hair cut is included in GDP.

         If my wife has a business, even with only me as her customer, paying taxes on the income for cleaning our house, then yes her services would be included in GDP. 

       Of course, the reason that I explained my answers is that you should check them.

          Technically, if she doesn't have a business, but I pay her, then no.  If my kid is paid "under the table, an allowance for mowing the lawn, no.  These would be more like transfer payments.

         So, the answer really depends on if taxes are paid on the income done for the work that is a final service.

         So, it kind of depends on what the author means by "hiring".  I have to conclude that to "higher" someone means they are reporting income and paying taxes.  I have to go with yes, it is included in GDP.

       This is why I dislike bubble exams.  I like to make sure I am allowed to explain my reasoning.

       If this was an exam, I'd be crossing my fingers a bit on the last one.  But then, I got an A+ in my macro economics course so I'm willing to bet $1 that I got it right.  If I got it wrong, I'd sure like to know what the author was thinking.

NI = GDP + NR - IBT - CCNI = National incomeNR = + or - Net income from assets abroad (net income receipts)IBT = Indirect business taxesCC = Depreciation

NI = 4'000 + 0 - 210 - 500 = 3'290

NDP = GDP - CCNDP = Net domestic product

NDP = 4'000 - 500 = 3'500

PI = NI - corporate taxes - retained earnings - social security + transfer payments +

net interestPI = Personal income

PI = 3'290 - 50 - 25 - 200 + 500 = 3'515

DI = PI - Personal taxesDI = Disposable income

DI = 3'515 - 250 = 3'265

Y=GDP- $6,000I=Gross Investment- $800Net Investment- $200C=Consumption- $4,000Nx=Government purchases of goods and services- $1,100Government Budget Surplus- $30

How do I calculate NDP?How do I calculate Net Exports?How do I calculate Government Taxes minus transfers?

Y=C+I+G+NX

NX = Y-C-I-G = 6'000-4'000 -800-1'100 = +100

NDP = GDP-CC

CC = Ig-In = 800-200 = 400

NDP = 6'000-400 = 5'600

Sg = T-G-TP30 = T-1'100-TP

T-TP = 30+1'100 = 1'130

Answ:NDP = 5'600NX = +100T-TP = 1'130

How to calculate Personal Income, Disposable Income, National Income, and Net Domestic Product?GDP 4000Transfer Payments 500Corporate Inc. Taxes 50Social Sec. Contributions 200

Indirect business Taxes 210Personal Taxes 250Undistributed Corp. Profit 25Depreciation 500Net Income Earned Abroad 0

Best Answer - Chosen by Voters

NI = GDP + NR - IBT - CCNI = National incomeNR = + or - Net income from assets abroad (net income receipts)IBT = Indirect business taxesCC = Depreciation

NI = 4'000 + 0 - 210 - 500 = 3'290

NDP = GDP - CCNDP = Net domestic product

NDP = 4'000 - 500 = 3'500

PI = NI - corporate taxes - retained earnings - social security + transfer payments + net interestPI = Personal income

PI = 3'290 - 50 - 25 - 200 + 500 = 3'515

DI = PI - Personal taxesDI = Disposable income

DI = 3'515 - 250 = 3'265

How can we calculate GNP, NNP, National Income, Personal Income and Personal Disposable income?How can we calculate GNP, NNP, National Income, Personal Income and Personal Disposable income with following data?

GDP = 5677.5Net Factor payment from abroad = 17.5Capital consumption allowance = 626.1Indirect taxes = 475.2Social security contribution = 528.8Govt. and business transfers to person = 771.1Dividends = 137Personal Tax & Non-Tax payment = 618.7

GNP = 5677.5 + 17.5

NNP = GNP – Depreciation NNP = 5677.5 + 17.5 – 626.1

National Income = NNP – In Direct Taxes + Subsidies National Income = 5677.5 + 17.5 – 626.1 – 475.2

PI = NI + Transfer of Payments – Profit Taxes – Undistributed profit PI = 5677.5 + 17.5 – 626.1 – 475.2 + 528.8 + 771.1 + 137

DPI = PI – Personal Taxes DPI = 5677.5 + 17.5 – 626.1 – 475.2 + 528.8 + 771.1 + 137 – 618.7

Now calculate yourself and you will find the answer.

How to calculate GDP, national income, disposable personal income, and personal savings?consumption=1000government transfer payments=100indirect business taxes=20gross private domestic investment=150exports=200government consumption and gross investment=240corporate profits=25dividends=5social insurance taxes=60personal income taxes=150imports=260personal transfers to foreigners=25net factor payments from abroad= - 30 (yes, negative)interest earned from government and consumers=12interest payments to business=5

Seems like "depreciation" is missed from list (it should be =10 for your task).

GDP - Gross Domestic ProductNI - National IncomePI - Personal incomeDI - Disposable incomePS - Personal savingsC - Consumption = 1000I - Gross investment = 150G - Government spending = 240Ex - Export = 200

Im - Import = 260CC - Depreciation = 10TP - Transfer payments = 100IBT - Indirect business taxes = 20NFI - Net factor income = -30PT - Personal taxes = 150RE - Retained earnings

GDP=C+I+G+Ex-Im = 1000+150+240+200-260=1330NI=GDP-IBT-CC+NFI= 1330-20-10-30=1270 Indirect bussines TaxPI=NI+RE-SS+TP+NetInterest= 1270+12-60+100+(5-25)=1302DI=PI-PT=1302 -150=1152PS=DI-C-BusinessInterest - PersonalTranfersToForeigners==1152-1000-5-25=122