ECON 291 Chapter Notes - Chapter 1-9: Gross National Product, Income Approach, Government Budget Balance
26 Jun 2018
School
Department
Course
Professor
Econ 291 Tutorial Questions Ch.1
1
Name Student ID #
1. The government expenditure component of GDP does not include spending on transfer
payments such as welfare benefits. Explain why transfer payments are excluded.
With transfer payments, no goods and services are produced (or provided), so there is no
contribution to GDP.
2. GDP does not include the value of used goods that are resold. Why would including such
transactions make GDP a less informative measure of economic well-being?
If the transactions of used goods were included, then the same good would be counted more
than once. GDP does not include the value of the used goods that are resold to avoid double-
counting.
3. Give two reasons that the unemployment rate may not measure correctly what we want it to
measure.
(1) The unemployment rate does not include the marginally attached workers (the
discouraged searchers).
(2) The unemployment rate does not adjust for job search intensity.
find more resources at oneclass.com
find more resources at oneclass.com
Econ 291 Tutorial Questions Ch.1
2
4. In a hypothetical island economy, there is a coconut producer, a restaurant, consumers, and a
government. In the current year, the coconut producer produces 20 million coconuts, which
are sold for $2.00 each. 10 million coconuts are sold to the restaurant, 5 million coconuts are
sold to the consumers on this island, and the remaining ones are sold to the foreigners. The
coconut producer pays wages of $8 million to its workers, and $2 million in taxes to the
government.
The restaurant sells $40 million in restaurant meals during the year. The total cost of
coconuts for the restaurant is $2.0 × 10 = $20 million, and the restaurant pays its workers $6
million in wages and the government $4 million in taxes.
The government collects taxes to provide national defense. That is, it uses all of its tax
revenue to pay wages to the army. Besides the above mentioned taxes from the coconut
producer and the restaurant, the government also collect $2 million from its residents in the
form of income taxes. The government has a balanced budget, which means the total defense
spending is equal to the total tax revenue.
a. Calculate GDP using the product approach.
Coconut producer: value added = $2.0 × 20 = $40 million.
Restaurant: value added = $40 – $20 = $20 million.
Government: value added = government spending on national defense = $8 million.
GDP = total value added = $40 + $20 + 8 = $68 million.
b. Calculate GDP using the expenditure approach.
C = $2.0 × 5 + $40 = $50 million; I = 0; G = $8 million; NX = $2.0 × 5 = $10 million.
GDP = C + I + G + NX = $68 million.
c. Calculate GDP using the income approach.
After-tax wage income = $8 + $6 + $8 – $2 = $20 million; After-tax profits of the
coconut producer = $40 – $8 – $2 = $30 million; After-tax profits of the restaurant = $40
– $20 – $6 – $4 = $10 million; Taxes = $8 million.
GDP = total income = $68 million.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Student id : the government expenditure component of gdp does not include spending on transfer payments such as welfare benefits. With transfer payments, no goods and services are produced (or provided), so there is no contribution to gdp: gdp does not include the value of used goods that are resold. If the transactions of used goods were included, then the same good would be counted more than once. Ch. 1: in a hypothetical island economy, there is a coconut producer, a restaurant, consumers, and a government. In the current year, the coconut producer produces 20 million coconuts, which are sold for . 00 each. 10 million coconuts are sold to the restaurant, 5 million coconuts are sold to the consumers on this island, and the remaining ones are sold to the foreigners. The coconut producer pays wages of million to its workers, and million in taxes to the government. The restaurant sells million in restaurant meals during the year.
