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ECON 203 Study Guide - Midterm Guide: Income Approach, Indirect Tax, Transfer Payment

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whitebee988
12 Aug 2015
School
University of Calgary
Department
Economics
Course
ECON 203
Professor
Ronald Schlenker

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ECON 203 Full Course Notes
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ECON 203 Full Course Notes
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Document Summary

What is spent on a product is the income to those who helped to produce and sell it. Gdp can be measured either from the expenditure approach or the income approach: expenditure approach. The economy is divided into four sectors: household, business, government, and foreign sector. C: consumption is the expenditures of the household sector. It includes spending on: durable goods which last for more than one year, 2) non-durable goods, and 3) services. I: investment is the expenditure of the business sector, including 1) purchases of new capital goods which are equipment or tools that aids in the production process, 2) changes in business inventories, 3) purchases of new residential housing. G: government purchases is the expenditure of the public sector, such as education and defense expenses. When there is a budget deficit, government needs to borrow debt from the business, household or the foreign sectors.

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Related Questions

1. Assume an economy with a Household Sector and a Business Sector. Household spending is given by C= 400 + 0.9Qd. Since there is no public sector, Qd = Q. Business sector spending is given as I = 1300. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Consumption Spending (C) and Household Savings.

2. Now add a Foreign Sector where Exports are X = 1000 and Imports are Im = 500 + 0.1Q. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Imports, Net Exports, Consumption Spending (C) and Household Savings.

3. Now add a public sector where Government Purchases are G = 2000, Transfer Payments are Tr = 2500 and Taxes are Tx = 500 + (1/3)Q. With the public sector Disposable Income is Qd = Q - Tx + Tr. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Imports, Net Exports, Taxes, Disposable Income, Consumption Spending (C), Household Savings and the Deficit.

Please explain what each equation represents in the answer.

1. Given the following data, answer questions. Compute GDP, NDP, NI, and DI if PI is $740

NOTE: Use both the expenditure and the income approaches for # 1.  

Personal taxes……………30              Gross private domestic investment………….145

Depreciation……………..40               Corporate income taxes………………………65

Transfer payments…….....35          Undistributed income………………………...45

U.S. exports……………..12               Compensation for employees……………….540

Dividends………………..37                Indirect business taxes……………………...105

Corporate profits……….147            Personal consumption expenditure…………630

Rents…………………….10                  Social security contributions……………….110

Interest..   ……………… 38              Federal government purchases……………..140

U. S. imports……………..7               State & local government purchases………..50

Proprietors’ income……..90

 

2. Given the following data, compute GDP, NDP, and NI

Personal consumption expenditure………………….219.1               

Personal taxes………………………………………...40.5

U.S. exports of goods & services…………………….17.8                

Transfer payment…………………………………….13.9

Net private domestic investment……………………..42.1              

Depreciation………………………………………….11.8

Government purchases……………………………….59.4                

Rents………………………………………………......5.0

U.S. imports of goods & services…………………....20.5

Interest...……………………………………………...12.6

Indirect business taxes………………………………..16.6   

               

 3. Given the following income data, answer questions #1 and #2 properly.

Year                 C                       Ig                     G                     Xn                                GDP

  1              $ 3971.62              $800.20         $1235.38          $ --20.00        =       $_________

  2              $ 5407.02            ------------          1580.51             --40.36        =                8318.48

  3              $ 5584.65             1390.52         --------------              89.33       =                8708.44

a. Fill- in all the missing blanks.

b.  How big/small is the size of C, G, and Ig out of Year2 GDP?

The expenditure and resource cost-income approaches to calculating GDP arrive at the same final number, but they calculate that number in different ways. To illustrate, consider the possible effects of the following transactions on GDP:

1. Ralph pays The Home Station $1,200 to plant a new lawn in his backyard. He's attracted by The Home Station's guarantee that he'll be happy with the new lawn, or he'll get his money back.
2. The Home Station pays Al's Lawn Care $850 to plant the lawn.
3. Al's Lawn Care buys grass seed worth $200 from Green Center Nursery.

Compute contributions to GDP, using the expenditure approach. Assume that Green Center Nursery receives the grass seed at no charge and that other costs are zero.

Hint: Add the amount of money spent by buyers of final goods and services.

Which of the following would be included in the expenditure method of calculating GDP? Check all that apply.

-The Home Station spends $850.

-Ralph spends $1,200.

-Al's Lawn Care spends $200.

The total contribution to GDP, measured by the expenditure method, is $______


Now use the following table to compute contributions to GDP, employing the resource cost-income approach. In particular, indicate the costs of intermediate goods and the value-added at each stage of production.

Stage of Production Sale Value Cost of Intermediate Goods Resource Cost-Income
Green Center Nursery $200 ? ?
Al's Lawn Care $850 ? ?
The Home Station $1,200 ? ?

The contribution to GDP that you found using the expenditure approach corresponds to the sum of the _____ at each stage of production.