Macro Theory Homework #1

Darren Wong Section 2 3. Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How should it affect GDP? Before the woman marries her butler, the butler provides a service and receives an income. This income comes from the womans expenditure of the butlers service. The service is valued at current market prices for butler services. Hence, the service performed is counted towards the GDP. After the marriage, however, the service is no longer included as part of the GDP, since GDP does not include goods and services produced and consumed by households. The reason for this is because the husband is no longer an employee and the service he provides will not be exchanged in the market nor evaluated at current prices. As a result, services are no longer accounted for and GDP falls. After they get married, the husband continues to wait on the woman as before, and she continues to support him. Since there is no change in the quality and quantity of the service rendered, is doesnt make sense for the GDP to change either. Hence, GDP should be revised to account for home outputs or problems might arise when comparing different countries, where some lean towards a higher ratio of goods and services provided by the household. 4. Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports. a. Boeing sells an airplane to the Air Force. Government Purchase b. Boeing sells an airplane to American Airlines. Investment c. Boeing sells an airplane to Air France. Net export -> export d. Boeing sells an airplane to Amelia Earhart. Consumption e. Boeing builds an airplane to be sold next year. Investment 8. Consider how each of the following events is likely to affect real GDP. Do you think the change in real GDP reflects a similar change in economic well-being? a. A hurricane in Florida forces Disney World to shut down for a month. Since Disney world provides entertainment services, a hurricane forcing the theme park to shut down would cause real GDP to fall for that period of time. Similarly, the economic well being will be worse off and moves in the same direction as the decline of GDP. b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests. New technology increases the production of wheat using the same amount of capital and labor. Higher production of wheat allows the farm to sell more wheat, or shift resources to produce other profitable goods. Overall, production and consumption increases, and hence real GDP, and the well being of the economy also increases. c. Increased hostility between unions and management sparks a rash of strikes.

Macro Theory Homework #1

Darren Wong Section 2 Because of strikes, there are less employees working, which causes firms to produce less gods and services. Effectively, real GDP will fall. And if the strikes persist, the economic well being will also be negatively affected. d. Firms throughout the economy experience falling demand, causing them to lay off workers. As workers get laid off, the firm provides less income (income side) and produces less goods and services (expenditure side). Since there are less workers getting paid, economic well being also goes down. e. Congress passes new environmental laws that prohibit firms from using production methods that emit large quantities of pollution. In the short term, GDP will decrease because firms have to switch production technologies and are not able to produce as many goods as before. However, more environmental friendly production methods can benefit the economic well being in the long term in the form of clean air, which is not accounted by GDP because there is no market place for clean air. f. More high-school students drop out of school to take jobs mowing lawns. In the short term, real GDP will increases because there is a higher output of lawn mowing services. However, in the long term, the future work force becomes less educated and productive. Hence, the future GDP will not be as high as it would be had the students stayed in school. The economic well being decreases because there is a reduction of educated workers. g. Fathers around the country reduce their work- weeks to spend more time with their children. The overall production of goods and services will decrease if fathers all over the country work less hours. Child rearing services will increase, but household services arent included in the GDP. Economic well being might not change because the fathers are still providing services in the household, only household services are not recorded in GDP .