Question 2 -

As part of its drive to replace welfare with workfare, the government decides to redesignate $100 billion in welfare benefits as government wages. The recipients become government employees.
A. For each of the methods used in calculating GDP, describe the effect of this policy change.
B. Suppose now that the workfare recipients are removed from the government payroll and moved into the payroll of the newly incorporated Workfare, Inc. As part of its support for the workfare program, the government stands ready to subsidize Worefare, Inc., if its sales do not cover its costs. Since Workfare Inc., has no products to sell, the subsidy ends up being the full $100 billion. How does this arrangement affect your answers to part a?

Question 4 -
The consumer price index for the 1978-82 period and the GDP deflator follow. This was a period of unusually high, but declining, inflation. (The CPI is equal to 100 in the base years, 1982-4; the GDP deflator is equal to 100 in the base year 1987.)
CPI GDP Deflator
1978 65.2 60.3
1979 72.6 65.5
1980 82.4 71.7
1981 90.9 78.9
1982 96.5 83.8

A. Calculate the rate of inflation according to both measures from 1979 through 1982. What might explain the differences between the two?
B. Suppose that the hourly wage for a group of workers that sign an employment contract for the three-year period starting in 1979 is indexed to the CPI according to the formula
?W/W = 0.03 + 0.5 ?CPI/CPI
Calculate the actual increase in wages during each year of the contract period. If the wage is $12.00 in 1979, what was it in 1980, 1981, and 1982? What happens to the real wage measured in terms of CPI?
C. Repeat your calculations with 0.03 reduced to 0 and 0.5 increased to 1. What indexing formula would the workers' employer have preferred? Is there any reason for the employer to have been happy with the other formula before actual inflation experience was known?

Question 8 -
Suppose that, in a given year, U.S. foreign trade consists of some consumer importing a single Toyota Camry for $20,000 (2.3 million yen). Here are some possible financial transactions to accompany the purchase: (i) The consumer pays with $20,000, which Toyota puts in its American bank account. (ii) The consumer pays with 2.3 million yen that happens to be in a Japanese bank account. (iii) The consumer pays with 20,000; Toyota invests the proceeds in U.S. Treasury bills. (iv) The consumer purchases 2.3 million yen on the foreign exchange market from some anonymous American foreign exchange trader and then pays for the car.
A. Is the United States running a current account surplus or deficit?
B. For each of the financial transactions just described, explain the effect the transaction has on the U.S. financial account. What is the sum of the current account and financial account balances?

Question 9 -
Net Domestic product is considered to be a better measure of welfare than GDP, since it adjusts for the fact that part of GDP must be devoted to replacing physical capital worn out during the course of the year. If we took this principle of adjusting for depreciation more seriously, what other expenditures would you want to deduct from GDP to get a clearer measure of net national product?