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# AGG ECON ANALYSIS ECON 4710

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This 9 page Class Notes was uploaded by Bethany Conn on Tuesday October 13, 2015. The Class Notes belongs to ECON 4710 at Louisiana State University taught by B. Unel in Fall. Since its upload, it has received 21 views. For similar materials see /class/223037/econ-4710-louisiana-state-university in Economcs at Louisiana State University.

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Date Created: 10/13/15

Homework 1 Economics 47107Fall 2010 Due on Thursday September 16 2010 1 Explain whether each of the following would be included in GDP GNP or both of the United States 93 The salary of and American who is working in Japan for Honda E7 The pro ts that Honda earns from its production of cars in Ohio 0 The value of the software that Microsoft sells to Honda for use in its headquarters in Japan D The salary of an Italian citizen who work in an Italian restaurant in NY Answer For GDP check where the production took place and for GNP check who produced the goods Thus 9 This will not be included in US GDP but it will be included in US GNP E7 If all pro ts be channelled to Japan then this will not be included in either US GDP or US GNP However such a case is very unlikely Most probably some part of the pro ts will be given to some Americans who work for Honda in Ohio In this case it will be included both in US GDP and GNP It will be included both in US GDP and GNP 0 9 It will be included in US GDP but not in US GNP 2 Orange growers sell 15 million of their crop to orange juice processors and 6 million of their crop to supermarkets The orange juice processors sell their orange juice to supermarkets for 18 million The supermarket sell oranges to consumers for 8 million orange juice to consumers for 18 million and orange juice to restaurants for 4 million The restaurants sell orange juice to consumers for 8 million a Calculate the amounts oranges and orange juice contribute to GDP b Calculate the value added by orange growers orange juice processors supermar kets and restaurant Answer a E7 Let us rst identify the nal products These are 1 oranges directly sold to consumers by supermarkets 2 orange juice directly sold to consumers by su permarkets and 3 orange juice sold to consumers by the restaurants Thus7 the amounts oranges and orange juice contribute to GDP is 818834 million Orange growers 15621 million orange juice processors18 153 million supermarkets 8184 6 186 million and restaurants 8 44 Notice that sum of these valueadded is 34 million7 ie7 total contribution to the GDP 3 Consider a hypothetical economy which produces three goods TVs7 books7 and ham burgers The following table shows the prices and output of the three goods for the years 20057 20067 and 2007 TVs TVs Books Books Hamburgers Hamburgers Year Price Quantity Price Quantity Price Quantity 2005 250 10 10 5 2 40 2006 300 20 12 6 3 60 2007 280 25 14 6 4 80 a What is the percent change in production of each of the goods from 2005 to 2006 T O 9 D and from 2006 to 2007 What is the percent change in prices of each of the goods from 2005 to 2006 and from 2006 to 2007 Calculate the nominal GDP in this economy for each of the three years What is the percent change in nominal GDP from 2005 to 2006 and from 2006 to 2007 Calculate the real GDP in this economy using 2005 prices for each of the three years What is the percent change in real GDP from 2005 to 2006 and from 2006 to 2007 Calculate the GDP de ator in this economy using 2005 prices for each of the three years What is the percent change in de ator from 2005 to 2006 and from 2006 to 2007 Answer a b Let PT7 PB7 and PH represent the unit price of TV7 Book7 and Hamburger and let QT Q3 and QH represent quantity of TV7 Book7 and Hamburger produced Recall that the percentage change in a variable X from year t to 25 1 is given by Xt 7 XtXt X 100 Thus7 the percent change in TV price from 2005 to 2006 will be 300 7 250250 X 100 20 Table 31 below represents all results Table 31 Percent Change in Year PT QT PB QB PH QH 2005 06 20 100 20 20 50 50 2006 07 67 25 167 0 333 333 c Table 32 represent calculations and results The percent change in nominal GDP from 2005 to 20067 for example7 is calculated as 6252 7 26302630 X 100 1377 Table 32 Nominal GDP and Percent Change in GDP Calculations Nominal Change Year PT X QT PB X QB PH X QH GDP in GDP 2005 250 X 10 10 X 5 2 X 40 2630 2006 300 X 20 12 X 6 3 X 60 6252 1377 2007 280 X 25 14 X 6 4 X 80 7404 184 d e Table 33 represent calculations and results The percent change in real GDP from 2005 to 20067 for example7 is calculated as 51807 26302630 X 100 97 GDP de ator is calculated as Nominal GDPReal GDP Table 32 Real GDP and Percent Change in GDP Calculations Real Change GDP Change Year PT X QT PB X QB 1 PH X QH GDP in GDP Def in Def 2005 250 X 10 10 X 5 2 X 40 2630 100 2006 250 X 20 10 X 6 2 X 60 5180 97 121 21 2007 250 X 25 10 X 6 2 X 80 6470 249 114 58 4 Consider an economy populated with students who consume three goods pizzas7 cola7 and ice cream ln 20067 they purchase 250 pizzas7 400 cans of cola7 and 300 cones of ice cream The following table shows the prices of these three goods for the years 20067 20077 and 2008 Year Pizzas Cola Ice cream 2006 55 10 12 2007 60 12 15 2008 70 15 18 a b What is the percent change in prices of each of the goods from 2006 to 2007 and from 2007 to 2008 Calculate the CPI for each of the three years using 2006 as a base year What is the percent change in CPl from 2006 to 2007 and from 2007 to 2008 Answer a E7 Let Pp PC and P represent the unit price of pizza cola and ice cream Table 51 below represents all results The way that calculations are carried out is the same as in problem 3a Table 41 Percent Change in Year PT Po Pp 2006 07 91 20 25 2007 08 167 25 20 Table 42 represent calculations and results CPl in 2006 and 2007 are calculated as 24302135 z 114 and 28902135 z 135 respectively The percent change in CPl from 2007 to 2008 for example is calculated as 135 7 114114 x 100 184 Table 42 CPI and Percent Change in CPl Calculations Cost of Change Year 250 x P17 400 x PC 300 x P Basket CPl in CPl 2006 250 x 55 400 x 10 300 x 12 2135 100 7 2007 250 x 60 400 x 12 300 x 15 2430 114 140 2008 250 x 70 400 x 15 300 x 18 2890 135 184 Nominal GDP P Q Real GDP P in base year Q Nominal GDP GDP Deflator Real GDP Current P of basket Q CPI Base Year P of basket Q Components of Expenditures Y C I GNX Not Working Unem lo ment rate p y Labor Force Constant Returns to Scale ZY FZK ZL Profit Revenue Labor Cost Capital Cost Profit PY WL RK Marginal Product of MPL FKL 1 K L MPK FK 1 L K L W Real Wage P R Real Rental Price F Profit Maximizing demand for MPL quotclue u M PK Economic Pro t Y MPL L MPK K CobbDouglas Production Function Capital Income MPK K aY Labor Income MPL L 1 aY Y MPL1 aZ MPK Y Disposable Income C C Y T r Saving Private S Public S SY T CT G National Saving SquotY C G Quantity Equation M V P Y Quantity Theory of Money AM AV AP AY Money Demand Function Lr ne Y Fisher Equation irne Net ExportNet Capital Out ow NX S I Equilibrium Condition Sr NCFr Ir Real Exchange Rate e P nominal P of American 6 P P of Foreign e P E P Ae A6 n n inflation Unemployment Rate U 1 Sollow Growth Model L SG 170 A investment depreciation k2 Aksk 6ngk 56 K a a K per effective Worker k EELGrowth y Dry k RateO I Y per effective Worker y EZL fk C y 1 Growth Rate 0 Y per workerZ y E In Ef llllbl lum Growth Rate gL Atk Ak0 TotalYYyEL 33 Ska Growth Rate ng Ak skW 6 n gk sk 6 n gk sy 6ngk k k S fky6ng In steady state capital stock is not changing investment equals depreciation 6 31 5V ck 6ngk 6 1 Sy capital effective worker 1 S E k gt 6ng outpute bc vevvorker 5 y6ng Maximize Consumption in Steady State Golden Rule MPK 6 n g k lt W 6 6ng Homework 2 Economics 47107Fall 2010 Due on Tuesday September 21 2010 1 Suppose that the production is described by Y FK L AKO394LO396 where A is a constant greater than zero that measures the productivity of the available technology K denotes the capital stock while L is the total amount of labor a Suppose that A 1 K 10 and L 20 What are the real wage and the real rental price of capital in this economy Suppose that a hurricane destroys the capital stock by 10 What happens to total output in percent The marginal product of capital The marginal product of labor Answer a E7 Real wage WP equals MPL and the real rental price RP equals MPK We know that when production function is Cobb Douglas Y Ku Ll D MPK aYK and MPL 17 aYL Using K 10 L 20 and Y 100394200396 x 1516 we obtain WP 06Y z 046 and RP 04Y z 061 Let K0 and K1 denote the initial and new capital stocks respectively Since 10 is destroyed K1 09K0 Total output Y1 will be Y1 09K00394L0396 090394Y0 z 09610 where Y0 is the initial output level Thus output declines by 4 Using above equations it is straightforward to show that MPL decreases by 4 while MPK increases by 67 2 Use market for loanable funds approach that we developed in class to explain what happens to national saving private saving private investment spending and the rate of interest if the following events occur a The government reduces the size of its budget de cit to zero by reducing gov ernment spending Because of some uncertainty about future at any interest rate consumers decide E7 to save more Because of a new wave of technical change businesses become very optimist 0 about the pro tability of their investments Answer Let S S and 5 denote national private and public savings respec tively WeknowSYiCiG SI YiCiT andSP TiGwhereTis total amount of taxes a If G decreases then obviously S will increase Thus supply of loanable funds which is S shifts to the right In new equilibrium interest rate will be lower and investment will be higher What happens to private saving Note that interest rate is now lower and it will increase the incentive to consume more Hence private saving will decrease E7 In this case there will be decline in consumption Thus national saving will increase at each interest rate ie it will shift to the right The consequences will be identical with those in part a Now the investment line will shift to the right In new equilibrium the interest 0 rate private investment and the national saving will be higher Higher the interest rate the lower will be the consumption hence private saving will also increase 3 Explain the difference between savings and investment as de ned by macroeconomists Which of the following situation represent investment Saving Explain a You borrow from a bank and use the money to construct a garage for your car b David Letterman spends 20 million to buy a mansion built in 1950 c You earn 200 and deposits it in your bank account d Rachel buys 100 shares of existing Microsoft stock Answer If you buy equipmentmechinary or construct a new building then it is investment For more on this point I strongly recommend you to read FYI box on page 28 in your book It provides excellent examples to clarify what is investment and what is not a lnvestment b Letterman s transaction has not created new housing for the economy it has merely reallocated existing housing Letterman s purchase is investment for him but disinvestment for the person selling the house If money just moves from Letterman s account to the other person s account then this transaction does not even have any effect on saving c Saving d Like part b this is not an investment 4 An economy has total output of 6000 Government purchases G are 1200 and total taxes are 1000 Consumption and investment are given by C 500 7 20 07Y 7 T 1200 7 30 a What is the equilibrium interest rate b Calculate private public and national saving in this economy c Suppose that government purchases are reduced to 1000 Redo the parts a and 0 Answer We know that S Y 7 C 7 G and the equilibrium interest rate is given by S I a Y 6000 G 1200 and T 1000 imply that C 4000 7 20 and S Y 7 C7 G 800 20 Since in equilibrium we have S I and I 12007 30 we have 800 1 20 1200 7 30 which implies that 8 b S Y 7 C7 T 1000 20 1160 and SP T7 G 7200 Thus the national saving is S 1160 7 200 960 c With G 1000 total saving is now given by S 1000 1 20 In equilibrium we have 1000 1 20 1200 7 30 which implies that 4 Given this it is easy to show that S 1080 SP 0 and S 1080

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