Economics 101 Exercise No. 1 2nd Semester 2008-09 Due Date: December 17, 2008 1. A.D.

Kraft

What are the effects on the components of GDP and on GDP itself of the following actions? Identify which accounts would be affected and how. a. b. c. d. A firms buying an auto for an executive and the firms paying the executive additional income to buy himself a car? Hiring and paying your spouse (who takes care of the house) rather than just having him or her do the work without pay? You decide to buy a Philippine made blouse rather than one made in China? A housewife who decides to become a nanny in Hongkong.

2. 3.

What is the difference between GDP and GNP? In the Philippines, what factor accounts for the large divergence of these two figures in recent years. Consider an economy which consists only of those who bake bread and those who produce its ingredients. Suppose that this economys production is as follows: 1 million loaves of bread (sold at P2 each); 1.2 million pounds of flour (sold at P1 per pound); and 100,000 pound each of yeast, sugar, and salt (all sold at P1 per pound). The flour, yeast, sugar, and salt are sold only to bakers, who use them exclusively for the purpose of making bread. a. b. What is the value of output in this economy (i.e., nominal GDP)? How much value is added to the flour, yeast, sugar, and salt when the bakers turn them into bread?

4.

This question deals with price index numbers. Consider a simple economy where there are only three items in the CPI: food, housing, and entertainment (fun). Assume in the base period, say 1980, the household consumed the following quantities at the then prevailing prices: Quantities Food Housing Fun Total 5 3 4 Prices per unit, Pesos 14 10 5 Expenditures, Pesos 70 30 20 ---120

___________________________________________________________________ a. Consider what the CPI will be in 1990 if the prevailing prices have changed as follows: food, P30 per unit; housing, P20 per unit; and fun, P6 per unit. What is the value of the CPI in 1991 if the price of food is P33 per unit; the price of housing is P25 per unit; and fun, P10 per unit. What is the inflation rate in 1991? In 1985, there was a technological revolution in gaming that led people to alter their consumption of entertainment. In that year, people consumed 6 units of food, 5 units of housing and 7 units of entertainment. What would be the CPI for 1990 and 1991 if the government decided to use 1985 as the new base year? Prices in 1985 were the following: food - P15, housing - P11, and fun - P5.

b. c.

5.

Assume that GDP is P1,200, personal disposable income is P1,000, and the government budget deficit is P70. Consumption is P850, the trade surplus is P20. Corporate savings is zero. a. b. c. How large is saving, S? What is the size of investment I? How large is government spending?