ECON

201 ANSWERS PROBLEM SET ONE 1. What counts as GDP (I)? a) GDP rises by $5,000. You are purchasing the final good of education. b) No impact. The used car you are buying has already been taken into account for a past GDP measure back when it was produced. At the time you are buying it is not a newly produced good. c) GDP rises by $100 million since this transaction accounts as Government purchases. The Dam can be thought as a final good purchased by the government. d) GDP rises by $5,000 per foreign graduate student. Since the local university is the one purchasing their services this is a transaction that takes place inside our economy. The production is still domestic. 2. What counts as GDP (II)? a) GDP rises by $2 million (final sale price of computers). $1 million is the value added by intermediate goods to the (final) GDP value. b) GDP rises by the $6,000 commission. (Capital gainsan increase in the price of an asset like a home, car, or paintingare not part of GDP since they werent produced that year. They arent part of national income, either.) What is taking into account for the GDP accounting is the (final) service provided by the real estate agent. c) No impact. This is a government transfer payment, not a government purchase of a good or service. If the government hired the unemployed and paid them to dig ditches or program in C++, then their wages would count as a government purchase. d) No impact. e) U.S. GDP rises by $50 million: NX rises by $50million. (Incidentally, this has no impact on European GDP for the same reason as in 2d). f) GDP rises by $25,000. The store added $25,000 of value to the U.S. economy. 3. National accounting over time (II)? 2016 2017 % Change Quantity of oranges 100 105 5.00% Quantity of boomerangs 20 22 10.00% Price of oranges 1 1.10 10.00% Price of boomerangs 3 3.10 3.33% Nominal GDP 160 183.70 14.81% Real GDP in 2016 prices 160 171.00 6.88% Real GDP in 2017 prices 172 183.70 6.80% Real GDP in chained prices 2017 171.94 183.70 6.84% NOTE: Due to rounding you may get slightly different numbers.

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4. a)

b)

c)

How large is the economy of India? The Indian nominal GDP in US dollars is 47.2 trillion/41.3 = $1.14 trillion. So the ratio is $1.14 trillion/$13.7 trillion, and it equals 0.083 or 8.3%. So Indias economy is about 8.3% the size of the US economy. We now compute PPP-adjusted Indian GDP in US prices: = (Price Level US / Price Level India) * Nominal GDP India in USD =(1/0.246) * $1.14 Trillion = 4.63 Trillion USD at purchasing power parity (aka. Common prices) Now we can compute the ratio of US to Indian GDP: $4.63 trillion /$13.7 trillion =0.338 = 33.8%. So Indias economy is actually about 34% the size of the US economy when measured in common prices. The numbers are different because many consumer goodsfood, haircuts, medical visitsare very cheap in India, when you are measuring in U.S. dollars. This is usually true in poor countries. Another way to see this is The Economist magazines Big Mac Index of the cost of living. The same McDonalds hamburger is much cheaper in poor countries than in rich countries (after doing the exchange rate conversion). This is a simple way of measuring the difference in the cost of living between the two countries.

5. Synthesize in 5 bullet points the NYT article. The BEA has made an important change to how GDP is computed. New category: intellectual property products. This includes enterntainment originals such as TV series. Long-lived TV series (like Seinfeld) will now be counted as Investment in GDP. The amount will be the production cost of the show. Important to recall the definition of GDP as the MARKET value of production. Hence, a free YOUTUBE video does not count as GDP because its price is zero. This new measure significantly increases the level of GDP but not much its growth rate.

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