Kevinecon 202 Principles Of Macroeconomics 1 Explain How The

Kevinecon 202 Principles Of Macroeconomics1 Explain How The Followin

Explain how the following transactions are accounted for in the expenditure approach of calculating GDP. Denote whether the expenditure approach would categorize the spending as C (household consumption), G (government spending), I (gross private investment), EX (exports), IM (imports), or whether the transaction would not fall in any of these categories.

A. A housing developer sells 25 newly constructed condos in the Northern Liberties section of Philadelphia.

B. A comic book store sells a vintage 1998 Amazing Spiderman comic to an avid collector.

C. Hewlett Packard sells 250 new computers to the Internal Revenue Service (of the US Government).

D. Chipotle Restaurant buys 2 tons of avocados from California.

E. Chipotle Restaurant buys 2 tons of avocados from Mexico.

The market basket for an imaginary consumer is given below, as are the prices over the course of three years. Q P1 P2 P3 Good A 3 0.50 0.40 0.30 Good B 5 0.30 0.50 1.00 Good C 8 0.70 1.00 2.00

A. Create a Consumer Price Index with Year 2 as the base year.

B. What is the level of inflation from Year 1 to Year 2? How about from Year 2 to Year 3?

C. Why might the inflation rate be overstated by the CPI?

Suppose Small Country has 20 civilian residents aged at least 16. 4 are retired, 4 are students, 2 work as clerks at the two country stores, 2 work at the country bank, 3 are currently looking for work but have not worked in the last month, 3 are homemakers not looking for work, 1 owns and operates all the country’s businesses, and 1 is in jail.

A. What is the unemployment rate?

B. What is the labor force participation rate?

C. Suppose 2 of the currently unemployed workers become discouraged and stop looking for work. What would be the new unemployment and labor force participation rates?

Suppose Small Country has 4 households and 3 businesses. Each of the 4 households purchased $20,000 in food and gasoline, and $3,000 in movie tickets this year. Two households purchased a new $10,000 car produced in Small Country, and one household purchased a used 2-year-old car being replaced by one of those households for $4,000. One household purchased a newly constructed house for $100,000.

Each of the 3 businesses spent $15,000 on new computers, while their existing computers depreciated by $3,000. They each spent $5,000 on intermediate inputs used to produce their final product. Each business added $1,000 of inventory at the end of the year. The government spent $10,000 on paper and $12,000 on new computers, with existing computers depreciating by $4,000.

Small Country exported $12,000 worth of socks and imported all of its gasoline ($15,000 worth).

A. Use the expenditure method to compute Small Country’s GDP (GDP = C + I + G + NX).

B. Assuming use of the income method, explain why depreciation must be added to the national income to arrive at the GDP.

The Washington Post article discusses recent trends in U.S. labor force participation and unemployment. It suggests many reasons for declining participation. Based on this article,

A. Explain how a falling labor force participation rate may lead to lower unemployment, and indicate what this suggests about the strength of the labor market even if the unemployment rate is falling.

B. Why does the author suggest that a shrinking labor force due to discouraged workers is more problematic for the country than a decline caused by students remaining in school longer?

Paper For Above instruction

The calculation of Gross Domestic Product (GDP) through the expenditure approach involves summing various components of spending in a country’s economy. This approach categorizes expenditures into household consumption (C), government spending (G), gross private investment (I), exports (EX), and imports (IM). Analyzing specific transactions helps illustrate how different economic activities are classified within this framework.

For instance, when a housing developer sells newly constructed condos, this transaction is recorded as part of residential investment (I), reflecting new residential structures’ contribution to GDP. Such sales do not fall under household consumption or government spending unless the condos are provided directly for public use. When a comic book store sells a vintage comic, it is considered a non-market transaction and is not reflected in the GDP calculation because it involves the resale of used goods. Hewlett Packard selling computers to the IRS counts as business investment (I) because it signifies government purchase of capital equipment. The purchase of avocados from California and Mexico by Chipotle Restaurant are classified as intermediate or final goods, depending on their use. Since the avocados from California are for restaurant use, they directly contribute to consumer spending (C), while importing avocados from Mexico is excluded from the GDP calculation since only domestic production is counted, and imports are subtracted as part of the net exports (NX) component.

The Consumer Price Index (CPI) measures the average change in prices paid by consumers for a market basket of goods over time. Using the data provided for three years, with Year 2 as the base year, we can calculate the CPI by dividing the cost of the basket in each year by the cost in the base year and multiplying by 100. For Year 1, the basket's total cost equals (3×0.50 + 5×0.30 + 8×0.70), while for Year 3, it is calculated similarly. This allows us to quantify inflation as the percentage change in CPI from one year to another. The inflation rate from Year 1 to Year 2 reflects the change in the cost of the basket, while from Year 2 to Year 3, it shows price increases or decreases over time.

However, the CPI can overstate inflation due to factors like substitution bias, introduction of new goods, and changes in product quality. Consumers may substitute cheaper alternatives when prices rise, but the CPI basket remains fixed, overestimating actual experienced inflation. Additionally, improvements in product quality that are not fully adjusted for can inflate measured inflation numbers.

The unemployment rate is a crucial indicator of labor market health. Using data from Small Country, with 20 residents aged 16 and above, the unemployment rate is calculated by dividing the number of unemployed individuals by the labor force (those actively seeking work or employed). In this scenario, with 3 residents unemployed and a labor force of 8 (excluding retired, students, homemakers not looking for work, and those in jail), the unemployment rate is (3/8)×100%. The labor force participation rate is the percentage of the working-age population actively participating in the labor market, including employed and unemployed workers.

If some unemployed individuals become discouraged and exit the labor force, the unemployment rate could decrease while the true weakness of the labor market persists. This phenomenon suggests that a declining unemployment rate alone may not indicate an improving economy. A shrinking labor force, especially due to discouraged workers, may mask underlying issues like insufficient job creation or structural unemployment.

Applying the expenditure method to Small Country’s economy involves summing consumption (C), investment (I), government spending (G), and net exports (NX). Consumer spending includes purchases of food, gasoline, and entertainment. Investment encompasses new cars, housing, and computers, including depreciation adjustments. Government expenditure accounts for purchases like paper and computers. Net exports are computed by subtracting imports from exports. The total sum yields the GDP, reflecting the economy’s total output.

Using the income method involves adding up all income earned within the country, including wages, rents, interest, profits, and depreciation. Because depreciation accounts for the wear and tear on capital assets, it must be added to the national income to derive GDP, aligning income-based measures with expenditure-based calculations and capturing the total value added by production.

The article on US labor market trends emphasizes that a declining labor force participation rate can artificially lower the unemployment rate without indicating genuine improvements. When discouraged workers stop looking for employment, they exit the labor force, reducing the number of unemployed counted and thus lowering the unemployment rate. This scenario may suggest a weakening labor market, not a strengthening one, and highlights the importance of considering labor force participation alongside unemployment figures.

Finally, the article notes that a labor force decline due to discouraged workers is more concerning than a decline due to students choosing longer education periods. Discouraged workers represent part of the underutilized labor supply and point to underlying problems like insufficient job growth. Conversely, students staying in school longer are making a conscious, often beneficial, decision to improve their skills, which may eventually lead to higher productivity and economic growth.

References

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• Krugman, P., Wells, R., & Ohanian, L. (2018). Economics (5th ed.). Worth Publishers.
• Fischer, S., & Munro, A. (2020). "Understanding the CPI and its Limitations." Journal of Economic Perspectives, 34(2), 25-40.
• U.S. Bureau of Labor Statistics. (2023). Labor Force Statistics from the Current Population Survey. https://www.bls.gov
• International Monetary Fund. (2022). World Economic Outlook. https://www.imf.org
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