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Assigment 2

The document is an assignment on macroeconomics submitted by Talha Pracha, covering various topics including GDP contributions, nominal vs. real variables, real earnings calculations, and growth rates of nominal and real GDP. It provides detailed calculations and explanations related to economic concepts such as interest rates, net factor payments, and current account balances. The assignment includes practical examples to illustrate the application of these concepts in real-world scenarios.

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Saad Pracha
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11 views

Assigment 2

The document is an assignment on macroeconomics submitted by Talha Pracha, covering various topics including GDP contributions, nominal vs. real variables, real earnings calculations, and growth rates of nominal and real GDP. It provides detailed calculations and explanations related to economic concepts such as interest rates, net factor payments, and current account balances. The assignment includes practical examples to illustrate the application of these concepts in real-world scenarios.

Uploaded by

Saad Pracha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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aSSIGMENT 2

Macroeconomics

Submitted to:
Sir Nayar Rafique
Submitted by:
Talha Pracha
Registration No:
225237 (BS AvM)
Date of Submission:
23rd October 2023

Department of Business Administration


Air University Aerospace & Aviation Campus, Kamra
Q1

Data of Pete’s the pizza man

Pizza produced in one year= $87,000 Taxes Paid= $5000

Inventory at start of year= $1000 Employees’ Salaries= $39,000

Vegetables and other ingredients= $11,000 Inventory at end of year= $2000

Pete’s Contribution to GDP this year= $71,000

 Total Pizza Production-Taxes-Vegetables and others


 $87,000-$5000-$11,000=$71,000

Pete’s and his employee’s contribution to GDP this year=$110,000

 Pete contribution in the GPD+ Employee’s contribution


 $71,000+$39,000

Q2
Nominal variables

Nominal variables are expressed in current or actual market prices. They reflect both changes in
the quantity of goods and services and changes in their prices. For example, nominal GDP,
nominal wages, and nominal interest rates are all expressed in current market prices.

Real variables

Real variables are adjusted for inflation, meaning they are measured in constant, inflation-
adjusted dollars. They reflect changes in the quantity of goods and services without the
distortions caused by changes in prices. For example, real GDP, real wages, and the real interest
rate are all expressed in constant dollars adjusted for inflation.

Economists concentrate on changes in real magnitudes because real variables remove the impact
of inflation, making it easier to compare economic performance over time. This is important
because nominal variables can be misleading due to changes in the price level. Real variables
provide a more accurate picture of economic growth, as they reflect changes in the actual
quantity of goods and services produced, consumed, or earned. This allows for a better
assessment of true economic growth. Real variables are essential for investment and decision-
making. Firms, individuals, and policymakers make decisions based on the real, inflation-
adjusted value of assets, incomes, and expenditures.

Q3

The formula to calculate real earnings is:


Real Earnings=Nominal Earnings/CPI*Base Year CPI

1) Richard Petty in 1975:

 Nominal Earnings (1975) = $6,265


 CPI (1975) = 52.5
 Base Year CPI = 100 (As mention in the book)

Real earning of 1975= 6,265/52.5*100

=119.333*100

=11933.3

Richard Petty's real earnings was $11,933.3 in 1975

2) Dale Earnhardt, Jr. in 2006:

 Nominal Earnings (2006) = $239,166


 CPI (2006) = 198.7
 Base Year CPI = 100 (As mention in the book)

Real earning of 2006= 239,166/198.7*100

=1203.65*100

=120365.3

Q4

GDP Formula= Y= Total income= Total production= Total Expenditure

Y= C+I+G+NX

Kwaki produced and sold 4000 canoes at a price of $1250 each. So, 4000*$1250=5,000,000

Kwaki produced 5000 canoes, which cost $1000 each to produce. So, 5000*$1000=5,000,000

Kwaki grow and eat corn worth of =55,000,000

Kwaki fished salmon worth of =30,000,000

Kwaki used salmon for fertilizer worth of =3,000,000

SO, 5,000,000+5,000,000+55,000,000+30,000,000+3,000,000=98,000,0000

Q5
Real interest rate = nominal interest rate - inflation rate

=i-π

So, Nominal interest rate=8%

Inflation rate =5%


Expected inflation rate =4%

Real interest rate= 8%-5%

=3%

Q6

Growth Rate of Nominal GDP

Growth Rate of Nominal GDP=(Nominal GDP IN 2018- Nominal GDP IN 2017/ Nominal GDP
IN 2017)*100

=(9254.6-8759.9/8759.9)*100

=5.65%

Inflation Rate

Inflation Rate=ΔPt+1/Pt

Given values: Pt (2017) = 102.86, Pt (2017) = 102.86

Change in the GDP deflator (ΔPt+1):

104.37-102.86=1.51

Calculate the inflation rate:

Inflation Rate=1.51/102.86*100%

=1.47%

Growth Rate of Real GDP

Growth Rate of Real GDP=Growth Rate of Nominal GDP−Inflation Rate


=5.65%-1.47%

=4.18%

Q7
Rent on the building= $0.5 Million

Taxes Paid= $0.5 Million

Profit of Carl= $0.5 Million

Total spending on the computers= $10 Million

Salary paid to Sales representees= $3.5 Million

GDP = Income of sales representatives + Rent + Taxes + Profit + Value of computers sold

GDP = $3.5 million + $0.5 million + $0.5 million + $0.5 million + $10 million

GDP = $15 million

So, Carl's Computer Center's total contribution to GDP for the year is $15 million.

Q8
Net factor payments

We define net factor payments from abroad (NFP) to be income paid to domestic factors of
production by the rest of the world minus income paid to foreign factors of production by the
domestic economy

Net exports (NX)


Net exports are exports minus imports. Exports are the goods and services produced within a
country that are purchased by foreigners; imports are the goods and services produced abroad
that are purchased by a country’s residents. Net exports are positive if exports are greater than
imports and negative if imports exceed exports.

Current account

The expression for national saving contains the term NX + NFP, which is the sum of net exports
and net factor payments, and is called the current account balance, CA. The current account
balance equals payments received from abroad in exchange for currently produced goods and
services (including factor services), minus thE payments made to foreigners by the domestic
economy

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