isi

[ritu]

1. (a) Suppose in year 1 economic activities in a country constitute only production of
wheat worth Rs. 750. Of this, wheat worth Rs. 150 is exported and the rest remains
unsold. Suppose further that in year 2 no production takes place, but the unsold wheat of
year 1 is sold domestically and residents of the country import shirts worth Rs. 250. Fill
in, with adequate explanation, the following chart :
Year GDP = Consumption + Investment + Export - Import
1 750           0                   600              150       0    
2 -250           600             -600               0       -250
(are these correct? )


2.(isi 2007----me 2  q 8)
3.. Suppose an economic agent’s life is divided into two periods, the first period
constitutes her youth and the second her old age. There is a single consumption good, C ,
available in both periods and the agent’s utility function is given by
U(C1,C2)=(C1^1-a) -1/1-a  + (1/1+p)  ( C2^1-a) -1 /1-a
where the first term represents utility from consumption during youth. The second term
represents discounted utility from consumption in old age, 1/(1+ ρ ) being the discount
factor. During the period, the agent has a unit of labour which she supplies inelastically
for a wage rate w . Any savings (i.e., income minus consumption during the first period)
earns a rate of interest r , the proceeds from which are available in old age in units of the
only consumption good available in the economy. Denote savings by s . The agent
maximizes utility subjects to her budget constraint.
i) Show that θ represents the elasticity of marginal utility with
respect to consumption in each period.
ii) Write down the agent’s optimization problem, i.e., her problem
of maximizing utility subject to the budget constraint.
iii) Find an expression for s as a function of w and r .
(iv)How does s change in response to a change in r ? In particular,
show that this change depends on whether θ exceeds or falls short

[Mr. Nobody]

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[ritu]

no ram....couldnt solve them....did u do this 1st question for which i have filled in my answers....

[aditi5000]

Year 1 - GDP = 750 ie I=600 and X=150
Year 2 - GDP = 350 ie cons of 600 and m=250

[aditi5000]

For part 1 of the other question just diff u(c1,c2) partially wrt c1 and c2 and you'll get the answer as elasticity meaning dmui/dci * ci/mui = theta
Sorry can't type it out here, too many thetas!

[ritu]

that i got....wat did ur demand functn for c1 and c2 come out to be???????
and what val;ue u got for ""s""????

[aditi5000]

c2 = (2w+wr) (1+r)^(1+theta)/theta
whole thing divided by
(1+r)(1+rho)^1/theta + (1+r)^1/theta

c1= c2 (1+ rho/1+r)^1/theta

s = 1 - c1

[aditi5000]

sorry s =w - c1

[Mr. Nobody]

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[Manvendra]

Hi

I have the following doubts..

-------------------------------

Here as we have counted 600 as investment in the first year  , do we need to count it again in the 2nd Year
( as no value addition is taking place ) ?

My question here is " If some goods are inventoried in one year (year 1)( and therefore counted as a part of investment in that year )  and then sold in the subsequent year (year 2) , then are we supposed to include it as a part of the GDP of year2 (consumption ) .


-----------------------------

When he imports goods worth 250 , it should affect two variables in the income identity - consumption ( which increases by 250 ) and Net Export ( which decreases by 250 )  ??


Please help

[aditi5000]

Here as we have counted 600 as investment in the first year  , do we need to count it again in the 2nd Year
( as no value addition is taking place ) ? NO, THIS UNSOLD WHEAT GETS CONSUMED SO IT DOESN'T COUNT AS INVESTMENT IN YEAR 2

My question here is " If some goods are inventoried in one year (year 1)( and therefore counted as a part of investment in that year )  and then sold in the subsequent year (year 2) , then are we supposed to include it as a part of the GDP of year2 (consumption ) . YES, EXACTLY



When he imports goods worth 250 , it should affect two variables in the income identity - consumption ( which increases by 250 ) and Net Export ( which decreases by 250 ) NO, ALTHOUGH IT IS BEING CONSUMED BY DOMESTIC HOUSEHOLDS, IT DOESN'T GET INCLUDED IN DOMESTIC GDP. IT FORMS A PART OF THE GDP OF THE FOREIGN COUNTRY. LIKE IF I'M CONSUMING CHINESE HANDBAGS NATURALLY IT DOESN;T GET COUNTED IN INDIAN GDP

[Manvendra]

Hi

Thanks for the reply.

one more related question :

the income identity states that

Y = C + I + G + X - Im

Now, as we know that an increase in Govt. Spending has a multiplier effect on the equilibrium level of income .
So , can we say that an increase in X ( or Im ) will have a multiplier effect on the equilibrium level of income ?

[aditi5000]

Yes, multiplier will be 1/1- MPC +MPM
or 1/1-mpc +mpm +tax rate*MPC in case there is taxation in the model

So there will be a multiplier effect only of there is a level of induced M (not just autonomous)

[Manvendra]

what do 'M' and 'MPM' stand for...?

[aditi5000]

m is imports
and m is marginal propensity to import
it lies between 0 and 1

[ritu]

in that intertemporal vala question ,what have you taken as old age income??????
""0"" or ""w""...i took it as 0....

[aditi5000]

old age income is w/1+r and accordingly, consumption is c2/1+r

[anon_econ]

aditi i'm not getting y gdp in the 2nd year is positive..isnt gdp the value of production?
i thot it would be 0=850-600+0-250 :/

[anon_econ]

consumption shud b 850 isnt it? 600 wheat n 250 shirts?

[AJ]

@ aditi..
Hi,

I am pasting some parts of abv discussion..from which I have doubt..

Year GDP = Consumption + Investment + Export - Import
1 750           0                   600              150       0    
2 -250           600             -600               0       -250
Is this correct?

then u replied..

Year 2 - GDP = 350 ie cons of 600 and m=250

And then to another doubt u replied this:

When he imports goods worth 250 , it should affect two variables in the income identity - consumption ( which increases by 250 ) and Net Export ( which decreases by 250 ) NO, ALTHOUGH IT IS BEING CONSUMED BY DOMESTIC HOUSEHOLDS, IT DOESN'T GET INCLUDED IN DOMESTIC GDP. IT FORMS A PART OF THE GDP OF THE FOREIGN COUNTRY. LIKE IF I'M CONSUMING CHINESE HANDBAGS NATURALLY IT DOESN;T GET COUNTED IN INDIAN GDP
...

Please explain me this....

U are right that these imports will be included in GDP of foreign country....but we substract them from ours cuz we have already included that in consumption.. right?
So, they shud first be added in C.. and then substracted as net exports.. as manvendra said!
or else we can skip the both... Am I right??
So, in answer by the initiator of this thread.. they have just been substracted.. so that's wrong...
and In answer U gave...

U substracted them... but didn't added in consumption .. and why leaved (-600) Investment ...???

Please explain this in a bit detail if I am making some mistake..

Thankyou in advance! :)