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Business Economic – Macroeconomic sample essay

Question 10:

a) Which of the following are final goods and services and which are intermediate goods and services? Please explain why in your answer.

i) A windscreen purchased by a motor vehicle spare parts supplier;

Intermediate goods – by national accounts (GDP) windscreen primary production value has already been accounted. It is being resold at a deflated value as second hand goods.

ii) A new bulldozer to be used by a construction company; Final goods – when a construction company buys and uses a new bulldozer becomes intermediate goods when it is used in the production of their products services in subsequent periods.

iii) A household cleaning service purchased by a family from a domestic cleaning service company; Final good – the resale value of the business contain value added. But it is not previously included in the national accounts.

iv) Coking coal Intermediate goods – as an ingredient it used into the production of other goods. As iron and steel, steam. Except being sold by exporting.

b) An economy produces final goods and services with a market value of $800 billion in a given year, but only $750 billion worth of goods and services is sold to domestic or foreign buyers. Is this nation’s GDP $800 billion or $750 billion? Explain your answer.

$800 billion is the nation’s GDP for the year. Because GDP includes the market value of final goods and services produced, despite the consequences of whether these products are sold. The unsold products are added to firm’s inventories and included in gross national and domestic investment.

c) Explain why a new truck sold for use by a transport company is a final good, even though it is a fixed investment (capital) used to produce other goods. Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP?

ANS

A new product and produced for the ultimate user is the final goods so the new tuck is a final goods, the transport company and therefore it should be added to GDP. By the ‘expenditure approach’. When a firm buys and uses the new truck, it subsequently becomes an intermediate good into the production of other products in subsequent periods.

Question 14:

a) The consumer price index (i.e. CPI) is the most commonly used measure of changes in the general level of prices in Australia. Discuss some of the advantages and disadvantages of using this measure. ANS:

It is approved that there are no strong advantages in using this measure.

There are three main criticism of this measure and they are:

1. Typical average basket for several age and income groups within the population may not reflect true consumer expenditure prototype. As, retired people buy a bundle of products that differs quite markedly form that of a typical family with fewer children related items. The CPI based inflation rate may undervalue the impact of inflation on older people if the cost of medical services is rising faster than other items of the CPI.

Question 15:

Which of the following would cause a growth in the money supply? Answer yes, no, or possibly. If your answer is ‘possibly’ then explain the circumstances under which the answer would be ‘yes’.

ANS

(a)The selling of government securities to banks; – NO because of money supply goes down.

(b)A fall in interest rates; – POSSIBLY – If the fall in interest was in response to raise in money supply, then the interest rate fall has not caused money supply to rise. The reserve bank decided to reduce interest rates, it would have to increase money supply by market operations to ensure that the lower interest ratewas the equilibrium one.

(c)An increase in government expenditure, financed by borrowing from the banking sector; – YES increasing money supply by the government outflow.

(d)The purchase of government securities by the Central Bank from the banking sector; – YES – an increase in money supply purchase of government securities by the Central bank.

(e)It is agreed by the Treasurer and the Governor of the Central Bank to reduce the target rate of inflation – NO – fall down money supply because this will result in reserve bank RAISING the cash rate and using market operations reducing the money supply to back it up.

Question 16:

ANS:

(a)DVD recorders imported into the nation from Japan; – Imports of goods (()

(b)Insurance cover purchased in the nation by overseas residents; – Exports of services (+)

b) The nation gives overseas aid to a developing country; – Capital transfers sent overseas from the nation (–)

(d)US car company sets up a factory in the nation; – Investment in the nation from overseas (+)

(e)Some of the nation’s residents take a holiday in Bali; – Imports of services (()

(f)Interest earned by the nation’s residents on overseas assets; – Other income inflows (+)

(g)Running down the stock of foreign exchange in the Central Bank of the nation; – Drawing on reserves (+)

(h)Migrants to the nation transferring property to the nation; – Capital transfers to the nation from overseas (+)

(i)New deposits made in banks in the nation by overseas residents; – Short-term financial inflows (+)

(j)The nation’s palm oil is sold in the United Kingdom – Exports of goods (+)

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