## Problem Set #1

Economics 100b; Spring 1996; Brad DeLong

1. Suppose Nucor Steel sells \$2,000 worth of steel to Ford, other producers sell \$5,000 worth of other inputs to Ford; Ford then uses the steel and other inputs to make a Taurus station wagon which it sells to the car dealership for \$15,000. And the car dealership then sells the station wagon to an economics professor for \$18,000. What is the total contribution to GDP made by this entire series of transactions?

2. Suppose the economics professor bargains hard, and pushes the car dealership's price down to \$15,500. What is the total contribution to GDP then? Does this difference make sense to you?

3. In times of inflation, does real GDP rise faster than nominal GDP? Slower than nominal GDP? The same as nominal GDP?

4. What is the largest category of expenditure in GDP?

5. What is the largest category of income in GDP?

6. Suppose a contractor builds a new home worth \$300,000 in 1996, but does not sell it and instead keeps it as part of the business's "inventory" of property for sale. How does this appear in the GDP accounts in 1996? Is it consumption, investment, government purchases, or net exports? What sub-category?

7. Suppose that at the end of 1997 the contractor sells the house for \$250,000 to a family moving into the area. How does this transaction appear in the GDP accounts for 1997?

8. Suppose that the family pays \$50,000 cash for the house, borrows \$200,000 from the bank, and pays \$14,000 in interest to the bank in 1998. Suppose, further, that the house would rent for \$10,000 in 1998 were it on the rental market. How does the house appear in the GDP accounts for 1998?

>

# Econ 100b

Created 4/30/1996
Go to