Problem_Set_I

Problem Set I 1. Use the following table of data to compute a hypothetical economy’s NDP, Net Exports, Government Taxes minus Transfers, Disposable Personal Income and Personal Saving. (Hint: You don’t have enough data to complete the entire National Income Accounts. There is enough information though to “puzzle” out the correct values!) Gross Domestic Product $6,000 Gross Private Domestic Investment 800 Net Private Domestic Investment 200 Personal Consumption Expenditures 4,000 Government Purchases (Consumption and Investment) 1,100 Government Budget Surplus 30 NDP = GDP – Depreciation Depreciation = Gross Private Domestic Investment – Net Private Domestic Investment Depreciation = $800 - $200 = $600 NDP = $6,000 - $600 NDP = $5,400 Net Exports (NX) = Exports – Imports or Y = C + I + G + NX $6,000 = $4,000 + $800 + $1,100 + NX NX = $100 Government Taxes minus Transfers $30 (BS) = TA – $1,100 TA = $1,130 Using (C + S – TR + TA = C + I + G + NX), $4,000 + $800 – TR + $1,100 = $6,000 TR = $100 $1,130 (TA) - $100 (TR) = $1,030 Gov’t Taxes minus Transfers = $1,030 Disposable Personal Income (YD) = Y + TR – TA YD = $6,000 + $100 - $1,130 YD = $4,970 Personal Saving (S) = YD – C S = $4,970 - $4,000 S = $970 2. A company had sales for the year of $2,500,000. Its expenses were: Wages $1,100,000 Interest 150,000 Indirect Business Taxes 120,000 Depreciation 300,000 Purchased Raw Materials 750,000 a) What was the company’s contribution to GDP' NI = $1,100,000 + $150,000 + Business Profit NI = $1,100,000 + $150,000 + [$2,500,000 - $2,420,000] NI = $1,330,000 GDP = NI + Indirect Business Taxes + Depreciation GDP = $1,330,000 + $120,000 + $300,000 GDP = $1,750,000 b) What was the company’s contribution to NDP' NDP = GDP – Depreciation NDP = $1,750,000 - $300,000 NDP = $1,450,000 3. Go to the Bureau of Economic Analysis website (www.bea.gov ) to view the US Economic Accounts. Click on GDP under National and then click on Interactive Tables. Choose Frequently Requested NIPA Tables and click on Table 1.1.1, which shows percentage annual growth in real GDP and its components. Adjust the table to show the data on an annual basis for the period 1995-2009. How would you describe the growth over the last three years of this past decade (2007-2009) and the last three years of the previous decade (1997-1999)' The growth over the last three years of this past decade (2007 – 2009) has slightly declined. 2007 caught the tail end of the GDP growth rally at 1.9%. 2008 was flat at 0% and 2009 saw a considerable decline of (2.6%). Personal consumption expenditure, which represents approximately three-fourths of GDP, mirrored the declining trend at (0.3%) and (1.2%) in 2008 and 2009 respectively. The growth over the last three years of the previous decade (1997 – 1999) saw a positive trend. The GDP consistently rose in the mid-to-high 4% range from 1997 to 1999. Personal consumption expenditures, Gross private domestic investment, and Gov’t consumption expenditures and gross investment were all up in those years. Go back to the Frequently Requested NIPA Tables and click on Table 1.1.2, which shows the contribution of each component of GDP to the overall GDP growth rate, assuming that all the other components remain unchanged. What does this data suggest about the primary sources of the decline in GDP over the 2007-2009 period' The data suggests that the primary sources of the decline in GDP over the 2007 – 2009 period was mainly driven by Gross private domestic investment. In 2008 & 2009, this component source declined (1.53%) and (3.24%) respectively. As economy deteriorated in these years, fewer investments were made to constructing houses, buildings, factories, and offices.