3. What is the definition of GDP? How would the value of output produced at an American-owned factory in the U.S. and a foreign-owned factory in the U.S. be treated in GDP accounting? 4. Why is GDP a monetary measure?
So let us understand what GNP is in order to compare these two entities. What is GNP? GNP refers to the total output of a country and the output of assets owned by domestic residents in foreign countries and is defined as the total market value of goods and services produced in a place over a given period of time, plus the income earned by that nation's citizens. GDP vs. GNP GNP is different when compared to GDP because GNP measures the output produced by a country's companies whether the company is physically located in the specific country or not. By contrast, GDP measures all output produced within a country whether or not the companies are foreign or locally owned.
This is the sum of cost of all the final products and services sold in any economy. There are categories of final products and services. The largest portion of the GDP is purchases by private consumers, from clothes and food to homes and cars, and services purchased such as utilities, housekeeping, and entertainment. Investment purchases done by companies and government spending are the other categories of the GDP. Also included in the sum are the net exports; the total exports minus the imports.
Since capital is assumed to be the only binding production constraint, investment (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) But investment is also equal to savings (S), which is equal to the average propensity to save (APS) times GDP (Y). Denote APS = s I = S = APS * Y = s*Y So, ICOR = (s Y) / (change in Y) Rearranging terms, G(Y) = (change in Y) / Y = s / ICOR Growth Rate of GDP per Capita The growth rate of GDP per Capita is defined as G(Y/P) = G(Y) – G(P) From (1), G(Y/P) = s / ICOR - G(P) (2) where G(P) = the population growth rate (1) Thus, a 1 percent increase in population growth will cause the growth rate of GDP per capita to decrease by 1 percent. The empirical question is whether policy makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1.
(4 marks) c) Setting MRS=MRT, solve the resulting equation algebraically for l as a function of G. (6 marks) d) What happens to consumption, wages and output as G increases? (6 marks) Question 2: Now consider the same representative agent, but subject to a proportional tax, so that the budget constraint is now C = (1 − t) z (1 − l) where t is the tax on wages. Assume z=1. a) Solve for labour supply as a function of t. (6 marks) b) Now assume that there is a target level of government spending, with a balanced budget: G = tz(1 − l) What is the value of t that maximizes tax revenue G? (6 marks) 1 City University London Intermediate Macroeconomics 1 Joe Pearlman c) Sketch the Laffer curve for values of t from 0 to 1.
Harrod-Domar Growth Model Notes The Harrod-Domar Model explains an economy’s growth rate in terms of the level of saving and productivity of capital. ( G=S/K S= national savings ratio; G=rate of growth of GDP; K=capital output ratio The model is based on the notion that actual income determines the amount of saving, which determines investment, which in turn is what affects the rate of economic growth. The Harrod-Domar model supports the Keynesian economic explanations in that an economy does not automatically achieve its potential. The model assumes: • The economy has a fixed capital: output ratio=K • Investment is defined as a change in capital stock (K) • Savings is a given proportion of national income • The economy is closed; where S=I G=S/K The equation implies that the growth rate of national income is directly related to the saving rate ‘S’. Whereas, the capital output ratio ‘K’ is negatively related to the growth rate.
Macroeconomic activity Is defined is the study of the economy as a whole, especially whether resources of the society are being used efficiently as possible and whether the ability of the country to satisfy it wants is growing over time. Aggregate supply refers to the value of goods and services that can country can produce. Aggregate demand means the total amount of spending in the economy by groups such as: consumers, business firms, the government and people from overseas who buy our goods and services. If aggregate demand is to high then problems such as inflation occur because the amount of people who want to spend exceeds the amount of goods and services that can be produced. However if aggregate demand is low, the society faces slow growth and unemployment.
The GDP value would then decrease, due to the move from Point A to C, and increase employment which would decrease savings. In addition, there is an inverse relationship to both bond prices and interest rates because as one increase in value, the other decreases, and vice versa. 2. IS-LM Model--Suppose that you have the following equations for the IS-LM model. The following are the equations of the IS-LM model, here including a feature that taxes are not simply given but depend on income through a tax function, T(Y).
2.In the graph below, assume that the market demand curve for labor is initially D1. Answer the following questions. [pic] a. What are the equilibrium wage rate and employment level? Wage rate is at b (dollars per unit) and the employment level is at f (quantity of labor).
The RRR can also be called as the discount rate, hurdle rate or the opportunity cost of capital. NPV takes into account the principle in economics referred to as the “time value of money” which implies that a dollar earned today is more valuable than a dollar earned tomorrow. It is to be noted that projects with zero or positive NPV are acceptable to a company from a financial viewpoint as the return from these projects equals or exceeds the cost of capital. Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. IRR represents the discount rate at which the present value of the expected cash inflows from a project equals the present value of the expected cash outflows.