ECON 438 Homework 1

1.  The Smith family of Tempe, AZ buys a new Volvo station wagon made in Sweden.

     How would this be recorded in the U.S. national income and product accounts?

a.       Consumption would increase, imports would increase, and GDP would be unaffected.

b.      Consumption would be unaffected, imports would increase, and GDP would decrease.

c.       Consumption would increase, imports would increase, and GDP would be increase.

2.  Which of the following would be included in the category “Gross Domestic

     Investment” (I) of the U.S. national income and product accounts?  There may be

     more than one correct answer.

            a.  tractors made by Caterpillar in Illinois and sold in the U.S.

            b.  tractors made by Caterpillar in Illinois and sold in Europe.

            c.  tractors made by Komatsu in Japan and sold in the U.S.

3.  Which of the following would not be an example of U.S. capital outflow?

a.       Intel builds a new fabrication plant in Vietnam.

b.      Boeing sells a commercial aircraft to the government of China.

c.       Bank of America makes loans to businesses in Brazil.

d.      My father buys bonds issued by the government of Italy.

4.  Balance of payments data for a country show that there is greater capital inflow than

     capital outflow, indicating that the net external wealth position of the country is

     declining.  Which of the following are necessarily implied by this information?  There

     may be more than one correct answer.

            a.  C+I+G > GDP

            b.   S < I

            c.   X < M

            d.  CA < 0

5.  By the year 2020, Japan is expected to receive more in income from overseas

     investments than she pays in income to foreigners who own assets in Japan in an

     amount equal to 2.0 percent of Japan’s GDP.  Also, because of a drop in saving

     associated with an aging population, Japan’s capital outflow in 2020 is expected to

     exceed capital inflow but only by 0.5 percent of her GDP.  Given this forecast, we

     can expect the Japan’s balance of trade (exports minus imports) in 2020 to be

                        _____% of GDP.

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6.  Shown below are selected macroeconomic variables for a given country.  Use the

     values given for the first four variables to determine the missing values for the

     last four variables.

            Gross domestic product (GDP) = 10,000

            Gross national income (GNI) = 8,400

            Current account balance (CA) = -500

            Domestic investment (I) = 2,400

            Balance of trade (X-M) =

            National saving (S) =

            Gross national expenditure (GNE) =

            Net capital outflow (KO-KI) =

7.  Airbus (a European consortium) operates a plant in Alabama.  To make a commercial

     aircraft, the plant purchases engines from a factory in Germany and instruments and

     assorted parts from aerospace companies in California.  The Alabama plant

     manufactures the frame and assembles the aircraft.  A typical Airbus plane which

     costs $30 mill contains $10 mill worth of engines, $8 mill worth of instruments and

     other parts.  The value added by the Alabama plant makes up the remaining $12 mill.

     How would U.S. GDP and its components be affected by the production of an Airbus

     plane in Alabama?

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8.  The following equations describe the macro economies of two countries.  Assume that

     GDP and GNI are equal.  They are denoted Y.  Use the information to answer the

     questions below.

     Note:  The interest rates r and r* are in percent.  Avoid simple algebraic mistakes.

     Home country:         Y = 5000

                                      C = 775 + .75(Y-T) – 150r

                                       I = 1000 – 50r

                                      G = T = 1000

     Foreign country:      Y* = 3750

                                      C* = 700 + .75(Y*-T*) – 100r*

                                       I* = 500 – 50r*

                                      G* = T* = 750

            a.  Derive the national saving functions of each country.  National saving may be

                 defined as (Y–C–G).  National saving will be a function of the interest rate.

                        S =

                        S* =

       Questions about an open economy equilibrium

            b.  Use the equilibrium condition “S+S* = I+I*” to determine the equilibrium

                 world interest rate.

                        r = r* =

            c.  Given the equilibrium interest rate, what are the net capital outflows of each

                 country?

                        S – I  =

                        S* - I* =

            d.  What is the difference between GDP and GNE (absorption) in each country?

                        Y – (C+I+G) =

                        Y* – (C*+I*+G*) =