Economics 100A
Prof. Yang

Solutions to Homework Problems                     Chapter:  1  2  3  4  5   6  7   8  9  12

Chapter 2

Numerical

1.   a)  GDP = C + I + G + EX - IM
                    = 4378.2 + 882.0 + 1148.4 + 659.1 - 724.3
                    = 6343.4

      b)  NDP = GDP - depreciation = 6343.4 - 669.1 = 5674.3

      c)  First calculate NI via the expenditure method:
           NI = NDP - indirect business tax and nontax liability
                            - business transfer payments
                            - statistical discrepancy
                            + government subsidy
                            + net factor income from the rest of the world
                = 5674.3 - 525.3 - 28.7 - 2.3 + 9.0 + 5.7 = 5132.7
            Next caluculate NI through adding up the incomes of different people:
            NI = compensation of employees + proprietors' income
                 + net rental income + corporate profits + net interest
                 = 3780.4 + 441.6 + 24.1 + 485.8 + 399.5
                 = 5131.4

5.   a)  Inflation:

           Year           CPI          GDP Def.

           1979         11.3%          8.6%
           1980         13.5             9.5
           1981         10.3           10.0
           1982           6.2             6.2

           Higher weights for housing costs and oil prices led the CPI to show higher inflation rates.

      b) 
            Year         DW/W         Wage         Real Wage

            1979                           12.00             16.53
            1980         .0976         13.17             15.98
            1981         .0819         14.25             15.68
            1982         .0607          15.11             15.66

            Real wage (1982-84 base) is wage/CPI.  Since  DCPI/CPI exceeds   DW/W in each period,
            the real wage declines.

      c)  
            Year         DW/W         Wage         Real Wage

            1979                          12.00             16.53
            1980         .1352        13.62             16.53
            1981         .1037        15.04             16.53
            1982         .0613        15.96             16.53

            The employer prefers the first schedule, since this lowers the wage payments.  However,
            if the employer expected inflation to average below 3% for the 3-year period, the employer
            would prefer to accept the latter agreement in 1979.

6.  
      a)                        1993         1994         Inflation
          
            Laspeyres       125           220             76.0%
            Paasche          173           270             56.5

      b)   Yes, because consumers usually respond to changing prices by purchasing less of those goods
            whose prices have increased the most. 

      c)   If workers receive a cost of living increase based on a Laspeyres index, they can always
            buy the old bundle of goods, and at the new relative prices would probably prefer to buy
            more peanut butter and less gasoline; this would make them strictly better off.  This is
            not the case for the Paasche index.

Analytical.

4.   a)   True. S_r = I - S_g - S_p. S_r is defined as -X which is the trade deficit, and -S_g is the government
            budget deficit.

      b)   True.  GDP is measured in terms of prices paid by purchasers; national income is measured
            in terms of prices received by firms.  To go from GDP to national income, we must subtract the
            difference between these prices, i.e., sales and excise taxes.

      c)   True.  Prices affect sales, which affect value added, which determines GDP.

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