PROBLEMS AND APPLICATIONS
If Americans save more and it leads to more spending on factories, there will be an increase in production and productivity, because the same number of workers will have more equipment to work with. The benefits from higher productivity will go to both the workers, who will get paid more because they are producing more, and the factory owners, who will get a return on their investments. There is no such thing as a free lunch, however, because when people save more, they are giving up spending. They get higher incomes at the cost of buying fewer goods.
A: 40 lawns mowed; 0 washed cars
B: 0 lawns mowed, 40 washed cars
C: 20 lawns mowed; 20 washed cars
D: 25 lawns mowed; 25 washed cars
The production possibilities frontier is shown in Figure 8. Points A, B, and D are on the frontier, while point C is inside the frontier.
Larry is equally productive at both tasks. Moe is more productive at washing cars, while Curly is more productive at mowing lawns.
Allocation C is inefficient. More washed cars and mowed lawns can be produced by simply reallocating the time of the three individuals.
The statement that society faces a short-term trade-off between inflation and unemployment is a positive statement. It deals with how the economy is, not how it should be. Since economists have examined data and found that there’s a short-term negative relationship between inflation and unemployment, the statement is a fact, therefore it is a positive statement. b
The statement that a reduction in the rate of growth of money will reduce the rate of inflation is a positive statement. Economists have found that money growth and inflation are very closely related. The statement tells how the world is, and so it is a positive statement. c
The statement that the Reserve Bank should reduce the rate of growth of money is a normative statement. It states an opinion about something that should be done, not how the world is. d
The statement that society ought to require social security recipients to look for jobs is a normative statement. It doesn’t state a fact about how the world is. Instead, it is a statement of how the world should be and is thus a normative statement. e
The statement that lower tax rates encourage more work and more saving is a positive statement. Economists have studied the relationship between tax rates and work, as well as the relationship between tax rates and saving. They have found a negative relationship in both cases. So the statement tells how the world is, and is thus a positive statement. TUTORIAL 2
Measuring a Nation’s Income and the Cost of Living
PROBLEMS AND APPLICATIONS
Chapter 23 : Problem 1, 6, 8 on page 525-526.
consumption increases, investment decreases
government purchases increase
consumption increases, net exports decrease/imports increase g
Nominal GDP (billions)
GDP Deflator (base year: 1996)
The growth rate of nominal GDP is ($9,873 − $9,269)/$9,269 100% = 6.5%.
The growth rate of the deflator is (118 − 113)/113 100% = 4.4%.
Real GDP in 1999 (in 1996 dollars) is $9,269/(113/100) = $8,203.
Real GDP in 2000 (in 1996 dollars) is $9,873/(118/100) = $8,367.
The growth rate of real GDP is ($8,367 − $8,203)/$8,203 100% = 2.0%.
The growth rate of nominal GDP is higher than the growth rate of real GDP because of inflation.
GDP is the market value of the final good sold, $180.
Value added for the farmer: $100.
Value added for the miller: $150 – $100 = $50.
Value added for the baker: $180 – $150 = $30.
Together, the value added for the three producers is $100 + $50 + $30 = $180. This is the value of GDP.
Chapter 24 : Problem 4 on page 544
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