Macroeconomics – ECON 111
Tutorial 1

Tutorial Information
Eilya Torshizian
PhD student and research assistant
Email address
e.torshizian@auckland.ac.nz
Office Hours
Thursday and Wednesday 1 to 2 pm Room 260-054, Level 0, Owen G. building
Office
Room 260-6121, Level 6, Owen G. Bld.
Tutorial forum
Economics bulletin at Facebook

me
Academic Experience
ECON 721, 711, 701, 322, 212 and MATHS 105, 108

Work Experience
Member of the board of directors at Rateb Construction and Development Co.
Chief executive officer at Exir Kish mineral water manufacturer.

Education
The University of Auckland, (currently studying)
PhD student, under supervision of Professor Arthur Grimes.
The University of Tehran, MA and BA in Theoretical Economics
Iran University of Science and Technology (IUST), Information Technology engineering.

Question 1
1. A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?

FINAL GOOD
GDP represents the amount of money one would need to purchase one year’s worth of the economy’s production of all final goods and services.
The contribution to GDP is $3, the market value of the bread, which is the final good that is sold.

2. What components of GDP, if any, would each of the following transactions affect? Explain.



A family buys a new refrigerator
Aunt Jane buys a new house
Fisher and Paykel sells a washing machine from its stock
You buy a pizza
Transit New Zealand repaves Highway 1
Your parents buy a bottle of Australian wine from a store in Dunedin
Nestle Australia builds a new chocolate factory in Christchurch

Y = C + I + G + NX


A family buys a new refrigerator

Consumption (C):
the spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):
the spending by firms on capital equipment, inventories, and structures, including new housing.

Government purchases (G):
the spending on goods and services by local, state, and federal governments

Y = C + I + G + NX


Aunt Jane buys a new house

Consumption (C):
the spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):
the spending by firms on capital equipment, inventories, and structures, including new housing.

Government purchases (G):
the spending on goods and services by local, state, and federal governments

Y = C + I + G + NX


Fisher and Paykel sells a washing machine from its stock


Consumption (C):
the spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):
the spending by firms on capital equipment, inventories, and structures, including new housing.

Consumption increases because a washing machine is a good purchased by a household, but investment decreases because the washing machine in Fisher and Paykel’s inventory had been counted as an investment good until it was sold.

Y = C + I + G + NX


You buy a pizza


Consumption (C):
the spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):
the spending by firms on capital equipment, inventories, and structures, including new housing.

Government purchases (G):
the spending on goods and services by local, state, and federal governments

Y = C + I + G + NX


Transit New Zealand repaves Highway 1


Consumption (C):
the spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):
the spending by firms on capital equipment, inventories, and structures, including new housing.

Government purchases (G):
the spending on goods and services by local, state, and federal governments

Y = C + I + G + NX


Your parents buy a bottle of Australian wine from a store in Dunedin



Consumption (C):
the spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):
the spending by firms on capital equipment, inventories, and structures, including new housing.

Government purchases (G):
the spending on goods and services by local, state, and federal governments

Y = C + I + G + NX


Nestle Australia builds a new chocolate factory in Christchurch


Consumption (C):
the spending by households on goods and services, with the exception of purchases of new housing.

Investment (I):
the spending by firms on capital equipment, inventories, and structures, including new housing.

Government purchases (G):
the spending on goods and services by local, state, and federal governments

Question 3
Consider an economy that produces only one good. In year 1, the quantity produced is Q1 and the price is P1. In year 2, the quantity produced is Q2 and the price is P2. In year 3, the quantity produced is Q3 and the price is P3. Year 1 is the base year. Answer the following questions in terms of these variables, and be sure to simplify your answer if possible.
What is nominal GDP for each of these three years?
What is real GDP for each of these three years?
What is the GDP deflator for each of these three years?
What is the percentage growth rate of real GDP from year 2 to year 3?
What is the inflation rate as measured by the GDP deflator from year 2 to year 3?

Year i: Pi Qi
P3Q3
P2Q2
1000P2/P1
1000
1000P3/P1
P 1 Q 3 − P 1 Q 2 P 1 Q 2 x 100 = Q 3 Q 2 −1 x 100

P 3 /P 1 − P 2 /P 1 P 2 /P 1 x 100 = P 3 P 2 −1 x 100

P1Q1

Question 4
Goods and services that are not sold in markets, such as food produced and consumed at home, are generally not included in GDP. Can you think of how this might cause the numbers in the second column of table 7.3 to be misleading in a comparison of the economic well-being of New Zealand and India? Explain.

not included in GDP
Some things that contribute to well-being are not included in GDP.
the value of leisure
the value of a clean environment
the value of almost all activities that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

In countries like India, people produce and consume a fair amount of food at home that is not included in GDP. So GDP per person in India and New Zealand will differ by more than their comparative economic well-being

Not included in Gdp?!
Average Measure
Infrastructure
Inequality

Question 5
One day Barry the Barber collects $500 for haircuts. Over this day, his equipment depreciates in value by $50. Of the remaining $450, Barry sends $30 to the government as GST, pays $100 to his new employee who is an exchange student from the UK and has a work permit, takes home $220 in wages and retains $100 in his business to add new equipment in the future. From the $220 that Barry takes home, he pays $70 in income taxes. Based on this information, compute Barry’s contribution to the following measures of income:
a) Gross Domestic Product
b) Gross National Income
c) National Disposable Income

= GDP - $100 = 400 = GNI.

a) GDP equals the dollar amount Barry collects, which is

b) Gross National Product (GNP) tracks down total income of all citizens of a country =

c) NNP = GNP – depreciation =
$400 - $50 = $350.

NNP + NCT= $350 + $0.

$350 + $50 = $400.

Gross National Disposable income = NDI + depreciation =

National Disposable income (NDI) =

$500.