Sem 1 Tutorial Flashcards
how do you calculate gross capital income?
GDP at market price - labour income - (taxes - subsidies)
how do you calculate net capital income?
gross capital income - depreciation
what is net domestic product?
GDP adjusted for depreciation
NDP @ market price = GDP - depreciation rate K
British PPP. The Office for National Statistics reports that GDP per capita in the UK was about £26
000 in 2013, whereas GDP per capita in the United States in 2013 was about $53 000. On a purchasing
power parity (PPP) basis, GDP per capita is listed as about $36 000 in the UK, and $53 000 in the USA.
The average exchange rate in 2013 was about $1.58 per pound.
(a) What is US GDP per capita at market exchange rates (expressed in dollars)? Is this higher or lower
than the PPP measure?
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(b) What is UK GDP per capita at market exchange rates (expressed in dollars)? Is this higher or lower
than the PPP measure?
(c) Based on your answers above, do you think that the price level is higher or lower in the UK? By
how much?
(d) In percentage terms, how much poorer are Brits than Americans when measured at market exchange
rates? What about at PPP? Which measure do you think is better?
This is given in the question: GDPPCUS,$ = $53 000. This is equal to the PPP
measure. The US is the reference country for PPP calculations, so these numbers will always be
equal to one another.
GDPPCUK,$ = GDPPCUK,£ ×ϵ$/£ = 26000 ×1.58 = $41 080 ≈$41 000. This is
higher than the PPP measure.
Prices are higher in the UK. To see how much, take 41 000−36 000
36 000 , which is about
14%. This means that if you took $114 and converted it to £s at market exchange rates, then
the £72 (and change) you would get can buy about as many goods as $100 spent within the
United States.
diff (market rates)= 22.6
diff PPP = 32.07
PPP is generally a better measure for standard-of-living comparisons, because they measure the
real purchasing power of incomes.
Cost minimization. A firm’s production function is given by: Q= K ^1/2 L^1/4 where Q is output in
thousands of units, K is capital input measured in machine-hours and L is labour input measured
in worker-hours. The firm is perfectly competitive and the factor prices are r = £2.50 per hour and
w= £7.50 per hour. The total costs are given by TC= rK+ wL.
Use the method of Lagrange multipliers to find the combination of K and L that minimises the cost of
producing Q= 4.5.
4.5 = (6L)0.5L0.25 ⇐⇒4.5 = 6
1
2 L3
4 = ⇒L=
4.54
62
3
= 2.25; K = 6L= 13.5.
Woodwork. A carpenter plans to make a rectangular wooden box with no lid (that is, open on its top
side) and with a capacity of 108 cubic metres. The necessary wood costs £25 per square metre. Find the
dimensions of the box that will minimize the cost of wood. Find also the minimized cost.
Substitute x= 2z and x= y into (4) to get 108 = 2z·2z·z= 4z3 ⇒z = 3.
Therefore, x = y= 6.
The minimised cost is
TC(x,y,z) = TC(6,6,3) = 50·6·3 + 50·6·3 + 25·6·6 = 2700
Which of the following will affect this year’s UK GDP (and how)? Suppose that a UK owned & operated automotive manufacturer…
…builds a car and sells it to the UK government – this will increase UK GDP
…builds a car and sells it to a Russian – this will increase UK GDP
…builds a car and puts it in inventory to sell next year – this will not affect UK GDP
…imports steel to expand its factory – this will decrease UK GDP
true, true, false, false
Explanation: GDP = C + I + G + X -M. i. adds to G, so is true, ii. adds to X, and so is also true, iii. adds to I, so is false. The only other statement (which students were most likely to be confused about) is iv. – although imports are subtracted from GDP, in this case the steel was also counted in investment. So overall, the steel (being produced abroad) has no effect on UK GDP (but does not reduce it).
Consider the following statements about Gross Domestic Product (GDP) and Gross National Income (GNI). Which (if any) of the statements are true?
|GDP -GNI| = net current transfers from the rest of the world.
For a country where many companies which produce domestically are foreign-owned, we expect GNI > GDP
On average, GNI is about 10% to 15% higher than GDP
Both GDP and GNI are already adjusted for the consumption of capital
FALSE
FALSE
FALSE
FALSE
False - the difference is not net current transfers, but net primary income ii. False (because net primary income will be negative for such a country – e.g. Ireland) iii. False – the average difference should be zero (because worldwide net primary income must add to zero), and a typical gap is just a few percent one way or the other. iv. False – the “gross” in the name of each means that they are not adjusted (the adjusted versions have “net” in the name).
In some country, the capital stock is twice as large as GDP at market price in one year. The depreciation rate is 7%, net exports are negative and equal to minus 5% of GDP, net primary income from the rest of the world is 3% of GDP and net transfers from the rest of the world are 1% of GDP at market price.
Calculate net national disposable income at market price as a percent of GDP at market price.
The first thing to note is that net exports is already in GDP, so we don’t need that number. The first thing we need is to calculate net GDP at market price (net of depreciation). This is 100 − 2 × 0.07 = 86%. To get net national income at market price, we need to adjust this figure for net primary income from the rest of the world, which gives us 86 + 3 = 89%. Finally, to get net national disposable income at market price, we need to add net transfers from the rest of the world, which gives 89 + 1 = 90%
Given the national accounts data below for some country, calculate net national disposable income at market price as a percentage of GDP (rounded to the nearest 1%)
GDP at market price …………………………………… 1000
Deprecation of capital …………………………………. 100
Labour income …………………………………………… 600
Net transfers from abroad ……………………………. -10
Net primary income from abroad …………………… 20
Indirect subsidies (subsidies on products) ………. 30
Indirect taxes (taxes on products) ………………….. 40
As seen in the textbook, the definition of net national disposable income at market price is: GDP + net primary income and net transfers from the rest of the world – consumption of capital. In this case, that’s 1000 + 20 − 10 − 100 = 910 = 91%.
Reusing the data from the previous question, what is gross value added at basic price as a percentage of GDP (rounded to the nearest 1%)
GDP at market price …………………………………… 1000
Deprecation of capital …………………………………. 100
Labour income …………………………………………… 600
Net transfers from abroad ……………………………. -10
Net primary income from abroad …………………… 20
Indirect subsidies (subsidies on products) ………. 30
Indirect taxes (taxes on products) ………………….. 40
As seen in the textbook, the definition of gross value added at basic price is: GDP – taxes less subsidies on products. In this case, that’s 1000 − 40 − 30 = 990 = 99%.
Consider the national income identity. According to the theory developed in the textbook, which of the following must be true in any given year?
C < GDP
G < GDP
X < GDP
M < GDP
Notice that the question emphasised the theory and not the data. In practice, all four of these inequalities are normally true, but in theory any of them can be false. How? The national income identity is: 𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝐼𝑀. Each variable has a value greater than zero, but because imports enter negatively, it means that we can in theory have extreme examples like: 𝐺𝐷𝑃 = 10, 𝐶 = 11, 𝐼 = 11, 𝐺 = 11, 𝑋 = 11, 𝐼𝑀 = 34. A situation like this cannot be sustained for long, but might be true in a given year. For example, during World War II, Malta was a major military outpost for the allies, and imports of military and other equipment were huge relative to domestic production. There are no reliable GDP figures for the time, but it would not be surprising if several of the inequalities above were violated (though not perhaps the one on exports, but as we saw in the tutorial sheet, small trans-shipment states like Singapore can regularly export more than 100% of GDP).
