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Lecture 10 – academic year 2013/14 Introduction to Economics Fabio Landini Macroeconomic Aggregates: Exercises and Applications 1

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Question: Suppose to measure the GDP of US summing the value of all final goods and services in the economy. Determine the effects on GDP of the following transactions: a)A restaurant purchases fish for $100 from a fisher; b)A household spend $100 eating fish in a restaurant; c)Delta Airlines buys a new jet from Boing for $200million; d)A Greek airline company buy a new jet from Boing for $200million; e)Delta Airlines sells on of her jet to Denzel Washington for $100million; Ex. 10.1 – USs GDP 2

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Answer: a)A restaurant purchases fish for $100 from a fisher; Definition of GDP: The GDP is the market value of final goods and services produced within a country in a given period of time Therefore, the right answer is no change: this transaction is a purchase of an intermediate goods. Ex. 10.1 – USs GDP 3

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Answer: b)A household spend $100 eating fish in a restaurant; Composition of GDP from the point of view of demand: Z = C + I + G + X – M +$100 GDP: personal consumption expenditure Ex. 10.1 – USs GDP 4

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Answer: c) Delta Airlines buys a new jet from Boing for $200million; Composition of GDP from the point of view of demand: Z = C + I + G + X – M +$200m GDP: Gross private domestic fixed investment Ex. 10.1 – USs GDP 5

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Answer: d) A Greek airline company buy a new jet from Boing for $200million; Composition of GDP from the point of view of demand: Z = C + I + G + X – M +$200m GDP: next export Ex. 10.1 – USs GDP 6

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Answer: d) Delta Airlines sells on of her jet to Denzel Washington for $100million; No change. The jet was already counted when it was produced, i.e., presumably when Delta (or some other airline companies) bought it new as an investment. Ex. 10.1 – USs GDP 7

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Consider an economy where: i)A company that extract argent pay workers 200,000 to extract 75 kg of argent. The argent is then sold to a jeweller for 300,000; ii)The jeweller pays her workers 250,000 to produce necklaces, which are then sold to final consumers for 1 million; Ex. 10.2 – Mines and Jewels 8

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Questions: a)Using the approach based on the value of final goods, how much is the GDP of this economy; b)Which is the value added at each stage of production? Using the approach based on the added value, how much is the GDP of this economy? c)What is the value of of total wages and profits? Using the approach based on income, how much id the GDP of this economy? Ex. 10.2 – Mines and Jewels 9

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Answer: a)GDP using the value of final goods; Using the approach base don the value of final goods, the GDP = 1 million, i.e., the value of the silver necklaces Ex. 10.2 – Mines and Jewels 10

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Answer: b)Added valued and GDP; The economy is based on two sectors: Mines – A.V. = 300,000; Jewels – A.V. = 1,000,000 – 300,000 = 700,000 GDP = sum of A.V. of the two sectors = = 300,000 + 700,000 = 1,000,000 (same as before) Ex. 10.2 – Mines and Jewels 11

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Answer: c) Wages, profits, and GDP; Wages: 200,000 + 250,000 = 450,000 (Mines) (Jewels) Profits: (300,000-200,000) + (1,000,000-250,000-300,000)= (Mines) (Jewels) = 100,000+450,000= 550,000 GDP = sum of wages and profits in the two sectors= = 450,000 + 550,000 = 1,000,000 (same as before) Ex. 10.2 – Mines and Jewels 12

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An economy produces three goods: cars, computers and oranges. Quantity and unitary prices for the years 2006 – 2007 are the following: Ex. 10.3 – Cars, CPU and Oranges (I) 13 20062007 QuantityPriceQuantityPrice Cars102,000123,000 Computers41,0006500 Oranges1,0001 1

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Questions: a)Which is the nominal GDP of the of the economy in 2006 and 2007? How much does it vary? b)Using the 2006 prices as a basis, which is the real GDP in 2006 and 2007? How much does it vary? c)Using the 2007 prices as a basis, which is the real GDP in 2006 and 2007? How much does it vary? d)Why doe the growth rates in b) and c) differ? Which is the most appropriate? Motivate your answer. 14 Ex. 10.3 – Cars, CPU and Oranges (I)

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Answer: a)Which is the nominal GDP of the of the economy in 2006 and 2007? How much does it vary? Definition: Nominal GDP t = price t x quantity t 2006 GDP: 10(2,000)+4(1,000)+1,000(1)=25,000 2007 GDP: 12(3,000)+6(500)+1,000(1)=40,000 % Δ = (40,000-25,000)/25,000 -> +60% nominal GDP 15 Ex. 10.3 – Cars, CPU and Oranges (I)

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Answer: b)Using the 2006 prices as a basis, which is the real GDP in 2006 and 2007? How much does it vary? 2006 real GDP: 25,000 2007 real GDP: 12(2,000)+6(1,000)+1,000(1)=31,000 % Δ = +24% real (2006) GDP 16 Ex. 10.3 – Cars, CPU and Oranges (I)

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Answer: c)Using the 2007 prices as a basis, which is the real GDP in 2006 and 2007? How much does it vary? 2006 real GDP: 10(3,000)+4(500)+1,000(1)=33,000 2007 real GDP: 40,000 % Δ = +21.2% real (2007) GDP 17 Ex. 10.3 – Cars, CPU and Oranges (I)

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Answer: d)Why doe the growth rates in b) and c) differ? Which is the most appropriate? Motivate your answer. The answers measure GDP in different units. Neither answer is incorrect, just as measurements in centimetres is more or less correct than measurements in inches 18 Ex. 10.3 – Cars, CPU and Oranges (I)

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Consider the same economy described before. Questions: Suppose that we use the 2006 prices as the basis to compute the real GDP in 2006 and 2007. Compute the GDP deflator for the year 2006 and 2007, and the inflation rate between 2006 and 2007 Ex. 10.4 – Cars, CPU and Oranges (II) 19

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Answer: GDP Deflator: Deflator 2006 = 1 (we use 2006 prices as basis) Deflator 2007 = 40,000/31,000=1.29 Inflation rate: -> 29% Ex. 10.4 – Cars, CPU and Oranges (II) 20

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Answer: GDP Deflator: Deflator 2006 = 1 (we use 2006 prices as basis) Deflator 2007 = 40,000/31,000=1.29 Inflation rate: -> 29% Ex. 10.4 – Cars, CPU and Oranges (II) 21

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