Ch15_Solutions

Solutions for End of Chapter Questions

Chapter 15

Easy

1 Car firms buy in raw materials (steel), intermediate goods (windscreens, tyres) and labour to make cars. Windscreen and tyre companies hire workers and also buy raw materials from other industries. What is the value added of the car industry (the three firms shown below)?

1 The value added is the value of the final product less the value of the raw material

used. Assuming that “the car industry” includes all three firms, then: 1000 – 120 = 880

2 GNP at market prices is £300 billion. Depreciation is £30 billion, indirect taxes £20 billion. (a) What is national income? (b) Why does depreciation cause a discrepancy between GNP and national income? (c) Why do indirect taxes enter the calculation?

2 (a) Both depreciation and indirect taxes need to be subtracted, hence £250 bn. (b)

National income is net national product at basic prices. Depreciation is part of the cost of producing output. (c) Indirect taxes do not add to the value of the national income. If they did nations would be able to become richer and richer simply by taxing more.

3 GNP = 2000, C = 1700, G = 50 and NX = 40. (a) What is investment I? (b) If exports

are 350, what are imports? (c) If depreciation = 130, what is national income? (d) In this example net exports are positive. Could they be negative?

3 (a) GNP = C +I + G + NX.: C + G + NX = 1700+ 50+ 40 = 1790, so I must be 210.

(b) The net value of international trade NX is +40, so if the value of exports is 350

the value of imports must be 310.

(c) 2000 – 130 = 1870.

(d) Yes, if the value of imports exceeds the value of exports. The economy would

have a balance of payments deficit.

4 Given the data below: (a) What is 2010 GNP in 2009 prices? (b) What is the growth rate of real GNP from 2009 to 2010? (c) What is the inflation rate?

4 (a) 2400 x (100/110) = 2182. (b) 182 / 2000 x 100 = 9.1%. (c) In this example, also 10

per cent.

5 Should these be in a comprehensive measure of GNP: (a) time spent by students in lectures; (b) the income of muggers; (c) the wage paid to traffic wardens;

(d) dropping litter?

5 This is a difficult question to answer, because the word “should” implies what

ought to happen, a concept economists normally avoid, rather than what actually does.

a) This is not included unless the students are in paid employment (eg apprentices

on day release.) The grants of full time students, where they exist, are transfer payments, not earned income. However, a case could be made for including the time even of full-time grantless students, since investment in human capital occurs.

(b) No –this is simply a “transfer“ payment, though if the mugged person claimed

on the insurance that would be counted.

(c) Ye, they are earnings. (

d) Environmentalists argue that pollution should ideally be subtracted from GNP.

Paradoxically, however, the wages paid to those who pick it up are counted, so in this way pollution actually adds to GNP (as, for example, does the cost of preventing crime)

6 Common fallacies. Why are these statements wrong? (a) Unemployment benefit props up national income in years when employment is low. (b) A high per capita real GNP is always a good thing. (c) In 2010 Crummy Movie earned £1 billion more at the box office than Gone With the Wind earned 50 years ago. Crummy Movie is already a bigger box office success.

6 (a) Unemployment benefit itself is a transfer payment, since it does not add to real

output. However, its expenditure adds to demand and may create the employment of others, so the statement is not completely wrong. (b) It depends on how the income is distributed. It might conceivably be undesirable if achieved by very unequal income distribution. (c) The £1 billion has to be adjusted for inflation.. In real terms, Gone With The Wind wins by a mile!

7. Which is the correct answer? (a) Increasing the staff of the police force in response to higher crime raises national income because government spending is higher (b) Increasing the staff of the police force reduces national income because