# ECONOMICS

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QUESTIONA:

Usingdata below, calculate:

1. GDP

2. NDP

3. NI

 NATIONAL INCOME DATA National Income Accounting Data Amount (billions) Compensation of employees 288.2 US exports of goods and services 63.4 Consumption of fixed capital 23.6 Government Purchases 188.8 Taxes on production and imports 28.8 Net private domestic investment 104.2 Transfer payments 27.8 US imports of goods and services 33.0 Personal taxes 81 Net foreign factor income 4.4 Personal consumption expenditure 438.2 Statistical discrepancy 0
1. GDP = Consumption + Investments + Expenditure by Government + Exports – Imports

=Personal consumption expenditure + Net Private Domestic Investment +Government purchases + US exports of goods and services – US importsof goods and services.

=438.2 + 104.2 + 188.8 + (63.4) + 33.0

=\$ 761.40 Billion

1. NDP = Consumption + Investment + Expenditure by Government – Exports + Imports – Depreciation

=Personal consumption expenditure + Net Private Domestic Investment +Government purchases + US exports of goods and services – US importsof goods and services – Consumption of fixed capital

=438.2 + 104.2 + 188.8 + 63.4 – 33.0 – 23.6

=\$738 Billion

1. NATIONAL INCOME (NI)

Thereare 2 approaches to obtaining the National Income from such data.Below I will calculate using one approach

ExpenditureApproach[ CITATION Rog13 l 1033 ]

NI= Consumption + Investment + Government expenditure + (Exports –Imports)

=Personal consumption expenditure + Net Private Domestic Investment +Government purchases + Transfer payments + Net foreign factor income + Personal taxes + US exports of goods and services – US imports ofgoods and services

=438.2 + 104.3 + 188.8 + 27.8 + 4.4 + 81 + 63.4 – 33.0

=\$874.9Billion

QUESTIONB:

Comparea \$40,000 income in 1980 to 2010 and analyze the following questions:

1. What are the differences in the available products?

Thefirst task is converting the purchasing power of the nominal amountbetween the two periods, 1980 and 2010. It will be through inflatingthe 1980 value so as to match the purchasing power in 2010. Inflationwill be the ration of the difference between CPI of 2010 and that of1980 then multiplied by 100. In 1980, it was 82.4 while in 2010 itwas 218.06.

Inflationwill therefore be: ((218.06 – 82.4)/ 82.4) * 100 = 164.64%

Thedifference in the products in 1980 and those in 2010 would benumerous. It is because of various factors such as technologicaladvances that have been able to create new designs, brands, qualityand appearance of products that did not exist in 1980. New productsand services such a personal computers, laptops, easy internet accesswere not present. Cost element has also changed as products andservices have become very expensive due to inflation as seen by the164.64% increase in prices of commodities.

1. What are the differences in the quality

Thereis varying quality differences from products and services rendered in1980 and those rendered in 2010. Some have become better while otherhave become worse. Most products and services, however, haveincreased their quality as products like automobile have becomefaster, lighter, efficient in fuel consumption and manageable. It isconsidered normal for people to the suburbs to drive home, to work orto school which never used to be the case in the 1980’s. Onlydignitaries and very wealthy people were seen driving in the 1980’s.

Pricesfor purchasing the vehicles have increased tremendously in comparisonto 1980 as the average price for a car in the 1980’s wasapproximately \$5,413 but in 2010 it averages about \$29,217[ CITATION Sui10 l 1033 ].

Certainservices like production and manufacturing of products were done inthe domestic country. Concept of offshore manufacturing was notcommon but in 2010, products are manufactured and produced oversees.Productions costs like labor charge, material costs and theiravailability are sorted out through this practice that had not yetbeen thought of in the 1980s hence reducing the costs and increasingsales revenue and profit.

1. If you made \$40,000 in 1980 and in 2010, what would your income status or wealth be in each time period?

Aperson in 1980 would purchase high-quality products than the one in2010 since high-quality products are very expensive in 2010 than theywere in 1980. As shown in the calculations above, the purchasingpower in 2010 is lower than that in 1980 and income of \$40,000 in2010 would be roughly 1.6 time less than that of a person in 1980earning \$40,000.

1. In which period would you choose to live, and why?

Differentpeople have different factors and aspects they would consider so asto make the decision a hand. My perspective is that the CPIcalculations show that the purchasing power of a person earning\$40,000 in 1980 is higher than that of a person earning the same in2010. In 1980, it is easier, from analyses done, to accumulate wealththan in 2010 and, therefore, it would be better to live in 1980 thanin 2010 despite the advances in quality and technology in 2010.

QUESTIONC:

Aggregatedemand model GDP (Y) = C + I + X (Open economy)

C= Consumption schedule = 100 + 0.75Y (Consumption function of income)

I= Planned Investment = 20

X= Net exports = 40

1. Calculate the equilibrium level of income or real GDP for the economy

Y= 100 + 0.75Y + 20 + 40

Y– 0.75Y = 100 + 20 + 40

0.25Y= 160

Y= 160/0.25

Y= 640

1. If the I changes to 15, what would happen to equilibrium Y? What does it reveal about the multiplier?

Y= 100 +0.75Y + 15 +40

Y– 0.75Y = 100 + 15 +40

0.25Y= 155

Y= 155/0.25

Y= 620

Themultiplier would be

=1 / (1-c)

=1 / (1 – 0.75)

=1 / 0.25

=4

QUESTIOND:

1. Consumer spending rises by \$5 billion every 1% rise in household wealth.

Investmentspending rises by \$20 billion every 1% fall in real interest rate.

Multiplier= 4

Thedirection in which the aggregate demand curve will shift at eachprice level and the eventual shift when household wealth falls by 5%as a result of household values and real interest rate falls by 2%.

Theinformation above shows a positive relationship between householdwealth and consumer spending. The fall by 5% of household wealthwill result in a fall in consumer spending by 5 (the percentagenegative change in household wealth) * \$5 (spending by consumers forevery 1% change in household wealth) = \$25 billion reduction inconsumer spending. It will result to shift the aggregate demand curveto the left[ CITATION Rog13 l 1033 ].

Thereal interest rate and the investment spending have an inverserelationship to a fall in real interest rate results to a reductionin the investment spending. If the real interest rate falls by 2%,the investment spending will increase by 2% (the change percentage) *\$20 billion (investment spending as a result of 1% change in realinterest rate) = \$40 billion. It will result in a shift of theaggregate demand curve to the right.

Ashift of the aggregate demand to left by \$25 billion and a shift tothe right by \$40 billion to the right will result in a net effect of\$15 billion and combined initial effect of the aggregate demand curveto the right.

Sincethe multiplier is 4, the aggregate demand curve will shift by 4(multiplier) * \$15 billion (net effect) = \$60 billion to the rightafter effect of the multiplier.

1. Use the hypothetical economy in the table below to calculate the aggregate demand and supply, as well as its price level.

 HYPOTHETICAL ECONOMY Amount of Real GDP Demand (Billions) Price Level (Price Index) Amount of Real GDP Supplied (Billions) 180 300 500 260 250 400 300 200 300 420 150 200 560 100 100

Theaggregate demand and supply level would be at the interception pointwhich is 300 units (in billions) while the price would be \$200.

1. Given the above information, in the hypothetical economy, what is the equilibrium price and level of real output? Graph both aggregate demand and aggregate supply curves.

1. Can there be equilibrium level of output at below full employment

Thedata provided does not have information enough to enable thecalculation and determination of equilibrium level of output. It,therefore, results to the inference that there cannot be equilibriumoutput level at below the full employment level.

1. At what price level will aggregate supply equal aggregate demand? At what price will demand fall below aggregate supply? Given a price level of \$250 will aggregate demand exceed supply?

Theaggregate supply would equal the aggregate demand at price level\$200, which is the interception point between the Aggregate demandcurve and the Aggregate supply curve. The resultant equilibriumoutput would be \$ 300 billion. Any price level above \$200 would havehigher quantity demanded than that supplied. For example at point\$250, the aggregate demand is 260 billion whereas the supply is \$400billion. It represents \$140 billion excess in the market as moreunits are supplied than those demanded.

1. If the aggregate demand schedule shifted by \$20 billion to the right at every level, what would be the new equilibrium level of income?

Anincrease in the aggregate demand which results in a shift in thedemand curve would result in the change in the equilibrium point. Thenew equilibrium will be \$210 for the price level, and the equilibriumoutput will be \$320 billion.

Belowis the data used to compute the change and shift of the demand by \$20billion

 Amount of Real GDP Demand (Billions) Price Level (Price Index) Amount of Real GDP Supplied (Billions) 180 300 500 260 250 400 320 200 320 420 150 200 560 100 100

References

Arnold, R. A. (2013). Economics. South Western: Cengage Learning.