Deck 2: National Income and Accounting

Question 1

What is the GDP deflator, and how does it differ from the consumer and producer price indexes Under what circumstances might it be a more useful measure of price than the CPI and PPI

Answer 1

Consumer price index (CPI) is an index that measures change in price of fixed basket of goods and services, mainly purchased by urban household.
Producer price index (PPI) is an index that measures change in selling price of goods and services as received by household.
GDP deflator is the ratio of nominal GDP over real GDP in a given year.
GDP deflator includes all the products produced in the economy in a specific period while CPI and PPI measure the change in prices of specific set of products.
So, when the general change in price level is to be measured, GDP deflator is a better measure.

Question 2

Suppose a country's CPI increased from 2.1 to 2.3 in the course of 1 year. Use this fact to compute the rate of inflation for that year. Why might the CPI overstate the rate of inflation

Answer 2

Inflation is rate of change of price level in the economy.
Consumer price index CPI is an index that measures change in price of fixed basket of goods and services, mainly purchased by urban household.
Inflation can be calculated as follows:
When we calculate inflation using CPI then the value we get might be overstated because of few reasons like:
1. Substitution bias which states that price of goods in basket increase then consumers may shift to substitutes.
2. Quality bias, that is, people may start buying products of different quality than before,
3. New product bias, that is, consumers might shift to new product altogether.

Question 3

What would happen to GDP if the government hired unemployed workers, who had been receiving amount $ TR in unemployment benefits, as government employees and now paid them $ TR to do nothing Explain.

Answer 3

Gross domestic production (GDP) of an economy is the total value of production of goods and services in the country in a specific period.
Unemployed benefits are the transfer payments. Transfer payments are not included in the GDP. Therefore, unemployed benefits of $TR does not form a part of GDP.
Unemployed benefits given to government employees are treated as salaries. Salary is included in the GDP. Therefore, salary of $TR increases GDP by $TR.

Question 4

If you woke up in the morning and found that nominal GDP had doubled overnight, what statistic would you need to check before you began to celebrate Why

Question 5

Section 2.1 in this chapter deals with the relationship between the different components included in the National Income and Product Accounts (NIPA for short). Go to www.bea.gov. Click on the heading "National," then click on "Interactive Tables: GDP and the National Income and Product Account (NIPA) Historical Tables" and then "Begin using the data..." Select "Section 1-Domestic Product and Income." Open Table 1.7.5, which should be titled "Relation of Gross Domestic Product, Gross National Product, Net National Product, National Income, and Personal Income (A) (Q)."
Use the information provided there to fill in columns 1, 2, 3, and 5 in the following table, and calculate GNP and NNP based on the formulas given in the second row of the table. You may have to first adjust the "First Year" to 2010 and the "Series" to Annual under "Data Table Options." Do the values you find correspond to the numbers reported at www.bea.gov

Question 6

Suppose you buy a $100 government bond that is due next year. How much nominal interest will you receive if inflation is 4 percent over the year and the bond promises a real return of 3 percent

Question 7

In the text, we calculated the change in real GDP in the hypothetical economy of Table 2-3 , using the prices of 2005. Calculate the change in real GDP between 2005 and 2010 using the same data but the prices of 2010. Your answer should demonstrate that the prices that are used to calculate real GDP do affect the calculated growth rate, but typically not by very much.

Question 8

Suppose you make a loan of $100 that will be repaid to you in 1 year. If the loan is denominated in terms of a nominal interest rate, are you happy or sad if inflation is higher than expected during the year What if the loan instead had been denominated in terms of a real return

Question 9

In the national income accounts, what is the difference between
a. A firm's buying an auto for an executive and the firm's paying the executive additional income to buy the automobile herself b. Your hiring your spouse (who takes care of the house) rather than having him or her do the work without pay
c. Your deciding to buy an American car rather than a German car

Question 10

How much was U.S. real GDP growth in the year 2012 What about the growth rate of U.S. population First, check out "Gross Domestic Product (GDP) and Components" at http://research.stlouisfed.org/fred2. Click on "Categories," under "National Accounts" select "National Income Product Accounts," then "GDP/GNP." Search "GDPCA," title "Real Gross Domestic Product." Click on "Download Data" and change the units to "Percent Change," then download the series. For population data, go to www.census.gov , then select "Estimates" under the "People" category. Click on "Current Estimates Data," and then under "Nation" and "Total Population," click on "V2012." Select "Population Change" and click on the data set that is NOT the cumulative estimate. The data set shows the annual population change in the United States between 2011-2012. Using these two pieces of information, what can you infer about the evolution of U.S. per capita real GDP in 2012

Question 11

Show from national income accounting that
a. An increase in taxes (while transfers remain constant) must imply a change in net exports, government purchases, or the saving-investment balance.
b. An increase in disposable personal income must imply an increase in consumption or an increase in saving.
c. An increase in both consumption and saving must imply an increase in disposable income.
[ For both parts b and c assume there are no interest payments by households or transfer payments to foreigners.]

Question 12

What is the difference between GDP and GNP Is one a better measure of income/output than the other Why

Question 13

The following is information from the national income accounts for a hypothetical country:

What is
a. NDP
b. Net exports
c. Government taxes minus transfers
d. Disposable personal income
e. Personal saving

Question 14

What is NDP Is it a better or worse measure of output than GDP Explain.

Question 15

Assume that GDP is $6,000, personal disposable income is $5,100, and the government budget deficit is $200. Consumption is $3,800, and the trade deficit is $100.
a. How large is saving ( S )
b. How large is investment ( I )
c. How large is government spending ( G )

Question 16

Increases in real GDP are often interpreted as increases in welfare. What are some problems with this interpretation Which do you think is the biggest problem with it, and why

Question 17

If a country's labor is paid a total of $6 billion, its capital is paid a total of $2 billion, and profits are zero, what is the level of output ( Hint: See equation 2.)

Question 18

The CPI and PPI are both measures of the price level. How are they different, and when might you prefer one of these measures over the other

Question 19

Consider an economy that consists only of those who bake bread and those who produce its ingredients. Suppose that this economy's production is as follows: 1 million loaves of bread (sold at $2 each); 1.2 million pounds of flour (sold at $1 per pound); and 100,000 pounds each of yeast, sugar, and salt (all sold at $1 per pound). The flour, yeast, sugar, and salt are sold only to bakers, who use them exclusively for the purpose of making bread.
a. What is the value of output in this economy (i.e., nominal GDP)
b. How much value is added to the flour, yeast, sugar, and salt when the bakers turn them into bread