Answers for Homework 1
Dear all, here are the answers and corresponding grades for each question of homework one.
Please check. If there is any question, please send me emails
（
wangyunshang1990@gmail.com
）
.
1. Please consider the following 5 items to see if they are included in GNP. How would they
affect GNP if they are included in the calculation of GNP? Please fill in unchanged if they
have already included in GNP.
(1) Environment pollution (increase, decrease, unchanged)
(2) Leisure (increase, decrease, unchanged)
(3) The expenditure that foreign tourists spend in China (increase, decrease, unchanged)
(4) Housework (increase, decrease, unchanged)
(5) Underground economy (increase, decrease, unchanged)
2． The following figures pertain to the economy of Red Island in 1993. Fill in the blanks. (There
are no business transfers, corporate income taxes, statistical discrepancy, subsidies or
surpluses of government enterprises, or contributions for social insurance. Interest paid by the
government is included in government transfer payments.)
Billions of dollars
Government expenditures on goods and services…………………………..100
Disposable income……………………………………………………………A
Exports……………………………………………………………………….50
Imports……………………………………………………………………….50
Undistributed corporate profits………………………………………………90
Net private investment………………………………………………………..B
Personal income………………………………………………………………C
Depreciation………………………………………………………………….50
Personal taxes…………………………………………………………………25
Government transfer payments……………………………………………….40
Personal saving……………………………………………………………….50
Government surplus or deficit…………………………………………………D
NNP……………………………………………………………………………E
GNP…………………………………………………………………………400
National income……………………………………………………………..325
Personal consumption expenditures…………………………………………200
Indirect business taxes…………………………………………………………F
Please calculate A-F.
Answers:
A = C+S = 200+50 = 250
B = I-D = (GNP-C-G-(X-M))-D = 400-200-100-(50-50) – 50 = 50
C = A+personal taxes = 250+25 = 275
D = T-(G+Rf) = (personal taxes + indirect business taxes) – (G+Rf) = (25+25)-(100+40) = –90
E = GNP-D = 400-50 = 350
F = NNP-NI = 350-325 = 25
3． Consider an economy that produces and consumes bread and automobiles. In the following
table are data for two different years.
Year 2003
Year 2013
Good
Quantity
Price
Quantity
Price
Automobiles
130
$50,000
150
$60,000
Bread
500,000
$10
400,000
$20
a. Using the year 2003 as the base year, compute the following statistics for each year: nominal
GDP, real GDP, the implicit price deflator for GDP, and a fixed-weight price index such as the
CPI.
b. How much have prices risen between 2003 and 2013? Compare the answers given by the
Laspeyres and Paasche price indexes. Explain the difference.
c. Suppose you are a senator writing a bill to index Social Security and federal pensions. That is,
your bill will adjust these benefits to offset changes in the cost of living. Will you use the GDP
deflator or the CPI? Why?
Answers:
a. Nominal GDP is the total value of goods and services measured at current prices.
