Problem: 1

a. Aggregate expenditure:

Aggregate expenditure is the sum of consumption expenditure, investment, government expenditure, and net exports i.e. AE = C + I + G + (X – M)

In the figure, B is consumption expenditure, D is investment, C is government expenditure, and E is net exports. Therefore Aggregate Expenditure = $7,064 billion + $1,624 billion + $1,840 billion + (−$330 billion) which is $10,198 billion.

b. Aggregate income:

Aggregate income equals aggregate expenditure, which from 1(a) is $10,198 billion.

c. GDP (Y):

Gross Domestic Product is measured either by adding all expenditures or all incomes received by all the factors of production. Therefore Y = $10,198 billion.

d. Government budget deficit:

The government budget deficit equals government expenditures minus net taxes i.e. (G – T). C is government expenditure, and A is net taxes. So the government budget deficit equals $1,840 billion minus $2,200 billion, which is −$360 billion, that is, the government had a government budget surplus of $360 billion.

e. Household saving:

Household saving S = (Y – C – T)

From 1(b), income (Y) is $10,198 billion. In the figure, B is consumption expenditure (C) and A is net taxes (T). Therefore household saving S = ($10,198 billion - $7,064 billion - $2,200 billion) which is $934 billion.

f. Government saving:

Government saving = (T – G).

In the figure, A is net taxes and C is government expenditure. Therefore government saving = ($2,200 billion - $1,840 billion) which is $360 billion.

g. National saving:

National saving = (Household saving + Government saving). Household saving is $934 billion (see answer 1e). Government saving is $360 billion (see answer 1f). Therefore National Saving = ($934 billion + $360 billion) which is $1,294 billion.

Problem: 3

* Martha’s initial capital stock is 10 copiers.

* Depreciation is 1 copier per year.

* Gross investment = (Net investment + Depreciation) which is equal to 5 copiers. * Net investment = (Gross investment – depreciation) which is 5 – 1 = 4 copiers. * Final capital stock = (initial capital stock + net investment) which is 10 + 4 = 14 copiers. Problem: 5

a. Calculate GDP in the United Kingdom.

GDP (Y) = Consumption expenditure (C) + Investment (I) + government expenditure (G) + (exports minus imports). Therefore GDP (Y) = 791 + 209 + 267 + (322 - 366).

Y = 1,223 billion Pounds.

b. Explain the approach (expenditure or income)

Expenditure approach is used. The income approach cannot be used because there are no data on interest, rent, depreciation, and indirect taxes and subsidies.

c. How is investment financed in the United Kingdom

I = S + (T – G) + (M – X)

Private saving (S) = S = (Y – C – T)

Net Taxes = taxes - transfer payments or T = 394 – 267

= 127 billion pounds

S = 1,223 – 791 – 127

= 305 billion pounds

I = 305 + (127 – 267) + (366 – 322)

= 209 billion pounds

Problem: 6

A country produces only bananas and coconuts. The base year is 2005, and the table below gives the quantities produced and prices.

Quantities produced20052006

Bananas bunches 1,000 1,100

Coconuts bunches 500 525

Prices

Bananas (per bunch) $2 $3

Coconuts (per bunch) $10 $8

a. Calculate nominal GDP in 2005 and 2006:

Nominal GDP 2005:

1,000*$2 + 500*$10

$2,000 + $5,000 = $7,000

Nominal GDP 2006:

1,100*$3 + 525*$8

$3,300 + 4,200 = $7,500

b. Calculate real GDP in 2006 using the base-year prices method (traditional method) 1,100*$2 + 525*$10

=$2,200 + $5,250

=$7,450

c. GDP deflator in 2006:

7,500 / 7,450 * 100 = 100.7

Problem: 7

Calculate by chain-method output index:

Step I:

Ans. Value of 2005 quantities at 2005 prices:

Bananas = 1,000* $2 = $2,000

Coconuts= 500 * $10= $5,000

$7,000...