ECN 201

ECN 201

1. The chart below presents 2003 data from the national-income accounts of the United States.
Component Billions of Dollars
Personal consumption 7,760.9
Employee compensation 6,289.0
Rents 153.8
Gov’t consumption and investment 2,075.3
Imports 1,544.3
Depreciation 1,379.5
Corporate profits 1,021.1
Interest income 543.0 Exports 1,046.2
Gross private investment 1,665.8
Indirect business taxes 838.6
Self-employment income 834.1
Net income to foreigners -55.2
a. Indicate the various components of GDP when it is derived by the expenditure approach. Calculate GDP using the expenditure approach.
b. Indicate the various components of GDP when it is derived by the resource cost – income approach. Calculate GDP using the resource – cost income approach (you’d better get the same number as you did in part a.!!!!!!!)
2. Which of the following would increase GDP?
a. A burglar steals your CD player from your dorm room.
b. You win 0 playing blackjack with your buddies in the dorm.
c. You decide to work five more hours each week at your library job since you figure you can easily pass EC 202.
d. You sell your CD player and buy 20 shares of Coca-Cola stock with the proceeds.
Briefly explain your answer choice.
Homework continues on other side of sheet
2
3. In the year 1999, you remember your dad telling you “boy, when I was your age, I
made $1.50 per hour. You don’t know how good you got it.” The reason for this
heart-to-heart is that in 1999, you earned $6.00 per hour and complained about
how low your pay was.
Clearly, your dad is confusing nominal and real values. When your dad was your
age, it was 1969 and the CPI was 36.7. In 1999, the CPI was 166.1 Tell your dad
what the 1999 real equivalent of his wage was. Did he really make less than you?
4. Suppose Country A is able to sustain an economic growth rate of 3% a
year and Country B is able to sustain an economic growth rate of 1% a
year.
a. How long will it take for income to double in each country?
b. Another way to look at the effect of growth rates on income is to use the
concept of compound interest. The formula for compound interest is:
? ?t F ? P? 1? r
P is the starting amount, F is the future amount, r is the growth rate, and t
is the number of years the economy has been growing for at that particular
growth rate. Note: enter in the growth rate in decimal form. That is, if
the growth rate is 3%, then r=0.03.
Suppose Country A and Country B both start with income equal to $100.
At their respective growth rates, what will income be in each country after
25 years? 75 years? 200 years? What does tell you about where income
inequality between countries comes from?
c. Suppose you are elected Prime Minister of Country B. Propose two
policies that would help Country B increase its growth rate? Explain why
your policies will promote economic growth.

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