C might miss significant portions 15. Suppose a college student is texting while
ID: 1153591 • Letter: C
Question
C might miss significant portions 15. Suppose a college student is texting while driving and cost of of the country's economic activity. [LO 7.7) turn be ubtract- ing pro- d at each ods that ain why standard oods and gets into a car accident causing $2.000 worth of dam- age to her car. Assuming the student repairs her car does GDP rise, fall, or stay constant with this accident? What does your answer suggest about using GDP asa measure of well-being? [LO 77] Problems and Applications value she . Suppose a gold miner finds a gold nugget and sells the that after py of her e 10 cop- 00. What company pies, each en? If it's sell in the 2. Table 7P-1 shows the price of inputs and the price of nugget to a mining company for $500. The mining com- pany melts down the gold, purifies it, and sells it to a jewelry maker for $1,000. The jewelry maker fashions the gold into a necklace that it sells to a department store for $1,500. Finally, the department store sells the necklace to a customer for $2,000. How much has GDP increased as a result of these transactions? [LO 71,7.3] : Why outputs at each step in the production process of mak- ing a shirt. Assume that each of these steps takes place mall coun- within the country. [LO 71, 7.3) isen by 10 s that this What is the total contribution of this shirt to GDP, using the standard expenditure method? a. b. If we use a value-added method (i.e., summing bers. What a reporter d you ask to s cconomic the value added by producers at each step of the production process, equal to the value of output minus the price of inputs), what is the contribu- tion of this shirt to GDP? c. If we mistakenly added the price of both inter- ercent from te this year mean hap- flation rate mediate and final outputs without adjusting for value added, what would we find that this shirt contributes to GDP? By how much does this overestimate the true contribution? 3. The U.S. government gives income support to many families living in poverty. How does each of the follow ing aspects of this policy contribute to GDP? [LO 7.2] ine the aver- ntries. What s not lead to TABLE 7P-1 Cotton Fabric Sewing and farmer (S) maker (S) printing () 1.10 3.50 al GDP. the Value of output 1.10 3.50 18.00Explanation / Answer
2.
a)
The aim of national income is to obtain a measure of total quantity of goods and services produced for the market in a given country over a given period of time. To measure the aggregate economic activity we are interested in gross domestic product or GDP. GDP is the dollar value of final output produced during a given period of time within the borders of United States. There are three approaches to measuring GDP:
According to the expenditure approach the contribution to the GDP by the shirt is $18. This is the final price the consumer pays while buying the shirt.
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b)
According to the product approch the value added of the cotton farmers is $1.10. The value added of the fabric maker is (3.50-1.10)=2.40. The value added by sweing and printing is (18-3.50)=14.50. Then the total value added by all producers are: (1.10+2.40+14.50)=$18.00. This is exactly equal to the value added by the shirt in expenditure approach.
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c)
The total value added by the shirt without adjusting for input cost is (1.10+3.50+18)=$22.60. This over estimate the shirt's value added by $4.60.
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