1. Categories of expenditures Kenji and Lucia Murphy live in Swarthmore, PA. Lucia's father, Paolo, lives in Sweden. For each of the following transactions, identify whether it is included in the calculation of U.S. GDP as part of consumption (C), investment spending (I), government purchases (G), exports (X), or imports (IM). Check all that apply. Note: A product's inclusion in one category does not necessarily imply that it is excluded from other categories. Transaction C I G X IM Lucia gets a new video camera that was made in the United States. O O O O Kenji buys a bottle of Italian wine. Paolo in Sweden orders a bottle of Vermont maple syrup from the producer's website. OO Kenji's employer upgrades all of its computer systems using U.S.-made parts. The state of Pennsylvania repaves highway PA 320, which goes through the center of Swarthmore. 02. The circular flow of income and expenditure The income and expenditure approaches to measuring a nation's GDP can be combined using the circular flow model. Categorize each flow in the following table as part of either aggregate demand or national income. Flow Aggregate Demand National Income Consumption (C) Disposable income (DI) Net taxes (NT) Net exports (X - IM) Government purchases (G) Investment spending (I) While national income and domestic product must be equal, income must also equal expenditure for each of the six sectors in the circular flow diagram: firms, consumers, government, nancial system, investors, and the \"rest of the world." For example, the amount of V flowing into the financial system sector must equal the amount of V flowing out of this sector. Categorize each flow in the following table as either an injection into the circular flow or a leakage from the circular flow. Flow Injection Leakage Net taxes (NT) Ex ports (X) Investment spending (I) Government purchases (G) Imports (IM) Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.50. That is, if disposable income increases by $1, consumption increases by 50. Suppose further that last year disposable income in the economy was $450 billion and consumption was $400 billion. On the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data. 700 0 son Consumption Function 500 400 300 200 100 CONSUMPTION (Billions of dollars) -1 00 0 1 00 200 300 400 500 600 700 800 DISPOSABLE INCOME (Billions of dollars) From the preceding data, you know that the level of saving in the economy last year was billion and the marginal propensity to save in this economy is Suppose that this year, disposable income is projected to be $650 billion. Based on your analysis, you would expect consumption to be billion and saving to be billion. 7. The consumption function Consider a country with the national income of $32 billion, the amount of taxes paid by households of $12 billion, and household consumption of $16 billion. Suppose that the marginal propensity to consume (MPC) is 0.7. On the following graph, use the bfue line (circle symbol) to plot the economy's consumption function. Note: Select and drag the line segment from the palette to the graph. Then select a point on the line segment and drag it to its desired position. x 1?, 50 O 45 40 Consumption Function 35 30 25 20 15 CONSUMPTION (Billions of dollars) 10 U | i i | l l i | l i 0 5 10 15 20 25 30 35 40 45 50 DISPOSABLE INCOME (Billions of dollars) Suppose now the country's national income increases to $35 billion. Assuming the amount paid in taxes is fixed at $12 billion and MPC : 0.7, what will the new household consumption be? $22.3 billion $18.1 billion $23.7 billion $21.6 billion 8. Measuring GDP The following table shows data on personal consumption expenditures, gross private domestic investment, exports, imports, and government purchases of goods and services for the United States in 2011, as published by the Bureau of Economic Analysis. All figures are in billions of dollars. Fill in the missing cells in the table to calculate GDP by adding together the final demands of consumers, business firms, the government, and foreignersa method of calculating GDP known as the expenditure approach. Data (Billions of dollars ) Personal Consumption Expenditures (C) 10,2790 Gross Private Domestic Investment (1) 1,854.9 Government Purchases of Goods and Services (G) 3,059.8 Exports (X) 2,094.2 Imports (1M) 2,662.3 Net Exports of Goods and Services Gross Domestic Product (GDP) 9. The income approach The following table shows macroeconomic data for a hypothetical country. All gures are in billions of dollars. Billions of Dollars Gross private domestic investment $1,800 Depreciation $1,487 Exports $2,420 Imports $1,000 Government purchases of goods and services $4,021 Personal consumption expenditures $5,800 Indirect business taxes and misc. items $841 Income received from other countries $618 Income paid to other countries $522 Compensation of employees (wages) $7,674 Corporate profits $1,395 Rental income $135 Net interest $403 Proprietors' income $843 If you calculate GDP by adding together the nal demands of consumers, business rms, the government, and foreigners (i.e., using the expenditure approach), GDP for this economy is billion. Given this information, the statistical discrepancy between national income and net national product, obtained when GDP is measured using the expenditure approach, is billion. 10. Comparing the expenditure and value-added approaches for calculatingGDP The expenditure and valueadded approaches to calculating GDP arrive at the same nal number, but they reach that number in different ways. To illustrate, consider the possible effects of the following set of transactions on GDP: 1. Jacques pays Better Buy $800 for a new high-denition television (HDTV) and its installation. He's attracted by Better Buy's guarantee that he'll be happy with the new HDTV or get his money back. 2. Better Buy pays Firedog $650 to install the HDTV. 3. Firedog buys hardware worth $50 from The Home Station. Compute the contribution to GDP of this set of transactions, using the expenditure approach, i. e., by assuming expenditures of buyers of nal goods and services. Assume that The Home Station receives the hardware at no charge and that other costs are zero. Which of the following would be included in the expenditure method of calculating GDP? Check all that apply. Jacques spends $800. Firedog spends $50. Better Buy spends $650. The total contribution of these transactions to GDP, as measured by the expenditure approach, is V . Now use the following table to compute the contribution of these transactions to GDP by summing the values added at each stage of production. Stage of Production Sale Value Cost of Intermediate Goods Resource Cost-Income The Home Station $50 Firedog $650 Better Buy $800 The contribution to GDP that you found using the expenditure approach corresponds to the sum of the V at each stage of production