ECON1002 Introductory Macroeconomics, Semester 2, 2022

TUTORIAL 2

(Week beginning August 8)

Answer Guide

READING GUIDE: REVIEW WEEK 1 LECTURE AND TEXTBOOK CHS 1 & 2.

KEY CONCEPTS: MEASUREMENT AND MEANING OF GDP

SELF-REVIEW OF CONCEPTUAL UNDERSTANDING

These are to be attempted before the tutorial. They may not normally be covered in the tutorial, maybe, except for a quick review, time permitting. The answers are typically found in the textbook and lecture notes.

1. What is the economic rationale for using market prices to value a nation’s GDP?

2. Distinguish between the production, expenditure and income approaches to calculating GDP? Would you expect these approaches to give the same figure for GDP? Explain.

3. Can a nation’s real GDP ever be less than its nominal GDP? Explain.

4. What’s the difference between GDP and GNI?

PRACTICE PROBLEMS (FOR IN-CLASS DISCUSSION)

STUDENTS SHOULD BE PREPARED TO PRESENT ANSWERS TO THE PROBLEMS WITH AN ASTERISK (*). 1*. Which of the following items would be included in (current) GDP? Explain why. (a)     You buy a second hand Mazda 3.

Second hand goods are not included in GDP

(b) Max Brenner purchases a new hot chocolate machine.

It is an investment good and hence included in GDP.

(c)     You buy a new Nespresso coffee machine.

It is a consumption good (unless running a café) and hence included in GDP.

(d)     You buy a copy of Mao’s Last Dancer from the US Amazon.

It is an import and a part of net exports, hence included in GDP.

(e) Wages earned by a French backpacker from picking grapes in the Hunter Valley

It is included in Australian GDP but not in France’s GDP.

2. George and John, stranded on an island, use clamshells for money. Last year George caught 300 fish and five wild boars. John grew 200 bunches of bananas. In the two-person economy that George and John set up, fish sell for one clamshell each, boars sell for 10 clamshells each, and bananas go for five clamshells a bunch. George paid John a total of

30 clamshells for helping him to dig bait for fishing, and he also purchased five of John’s mature banana trees for 30 clamshells each. What is the GDP of George and John’s island in terms of clamshells?