Department of Economics Fall 2009

University of California, Berkeley Professor Olney

Problem Set ! Pa"e ! of 5
Suggested Solutions for Problem Set #1
1. (2 points total; 1 point each)
From any reliable news source (online or in print), find an article published since August 1, 2009 which is relevant
to any topic addressed in lecture since the semester began !rint out (or cut out) the article "rite your paragraphs
for (a) and (b) using a word processing program #ouble space, 1$12%& margins, 10$12 pt font, no more than 1
page Attach your write$up to your answer sheet After your write$up, attach the article
a "rite one paragraph that summari'es the article you have chosen "hat is the topic( "hat conclusions are
drawn( "hat evidence is offered or referred to in support of the conclusions(
b "rite a second paragraph that e)plains how your article is relevant to or connected to something that has been
discussed in lecture "hat is the topic from lecture( *ow does your article connect to that topic(
Answers obviously vary. If you chose a relevant article, and wrote coherent paragraphs that answered the questions
asked, you got full credit.
2. (2.5 points total; 1 point each for parts a and b; 1/2 point for part c)
+se the ,conomic -eport of the !resident 2009 (,-!) at http.//wwwgpoaccessgov/eop/tables09html +se a
program such as ,)cel to answer the 0uestions
a +se 1able 22 to find the annual real values of consumption (3), investment (4), government purchases (5), and
net e)ports (67) 8ou will need to calculate the value of 67 for the years before 1990 6otice that ,-! refers
to 5 as 95overnment consumption e)penditures and gross investment: Also notice that half the table is in
9;heet 19 and the other half is in 9;heet 2: <anipulate the spreadsheet so that you can on one page print out
the annual real values for =ust 5#!, 3, 4, 5, and 67 for 19>0 to 200? @ust print out the annual data for 19>0
to 200?, not the 0uarterly data also @ust print out the column with the year and those five columnsA donBt print
out the entirety of 1able 22
TABLE B2.Real gross domestic product, 19592008
[Billions of chained (2000) dollars, except as noted; !arterl" data at seasonall" ad#!sted ann!al rates$
%ear or !arter
&ross
do'estic
prod!ct
(ersonal
cons!'ption
expendit!res
&ross pri)ate
do'estic
in)est'ent
*et exports
&o)ern'ent
cons!'ption
expendit!res
and +ross
in)est'ent
&,( - . */ &
0120. 2,300.4 0,315.6 222.2 702.5 503.6
0120. 2,320.0 0,280.8 226.1 700.3 530.8
0122. 2,503.2 0,500.0 214.6 704.2 515.2
0128. 2,486.0 0,540.2 804.3 706.4 404.0
0126. 2,114.2 0,444.6 866.5 71.0 482.0
0123. 8,010.0 2,005.5 818.0 704.1 420.8
0122. 8,811.0 2,020.4 625.5 780.0 185.0
0125. 8,646.2 2,043.0 604.0 781.2 0,004.1
0124. 8,232.5 2,800.3 680.1 736.2 0,060.3
0121. 8,523.6 2,812.6 635.0 734.1 0,084.0
0150. 8,550.1 2,630.1 625.0 732.0 0,002.1
Department of Economics Fall 2009
University of California, Berkeley Professor Olney
Problem Set ! Pa"e 2 of 5
TABLE B2.Real gross domestic product, 19592008
[Billions of chained (2000) dollars, except as noted; !arterl" data at seasonall" ad#!sted ann!al rates$
%ear or !arter
&ross
do'estic
prod!ct
(ersonal
cons!'ption
expendit!res
&ross pri)ate
do'estic
in)est'ent
*et exports
&o)ern'ent
cons!'ption
expendit!res
and +ross
in)est'ent
&,( - . */ &
0150. 8,414.2 2,363.3 653.5 720.2 110.4
0152. 6,003.0 2,500.8 382.0 758.3 148.3
0158. 6,860.3 2,488.4 316.6 730.1 140.0
0156. 6,801.2 2,402.8 330.2 721.6 0,006.5
0153. 6,800.2 2,452.1 638.0 72.6 0,025.6
0152. 6,360.1 8,083.3 366.5 785.0 0,080.1
0155. 6,530.3 8,026.0 225.0 720.0 0,068.8
0154. 3,003.0 8,808.0 502.2 720.1 0,056.0
0151. 3,058.6 8,848.6 523.0 760.0 0,016.0
0140. 3,020.5 8,856.0 263.8 02.2 0,003.6
0140. 3,210.5 8,622.2 506.1 4.8 0,023.2
0142. 3,041.8 8,650.8 202.0 702.2 0,063.6
0148. 3,628.4 8,224.2 222.3 720.2 0,045.8
0146. 3,408.2 8,428.8 435.5 7022.6 0,225.0
0143. 2,038.5 6,026.0 461.5 7060.3 0,802.3
0142. 2,228.2 6,224.1 468.1 7032.8 0,812.3
0145. 2,653.0 6,821.4 450.0 7064.6 0,622.5
0144. 2,562.5 6,362.1 410.3 7002.4 0,663.0
0141. 2,140.6 6,253.0 122.2 751.2 0,642.3
0110. 5,002.3 6,550.8 413.0 736.5 0,380.0
0110. 5,000.3 6,554.6 422.2 706.2 0,365.2
0112. 5,882.2 6,186.4 441.0 703.1 0,333.8
0118. 5,382.5 3,011.4 124.8 732.0 0,360.0
0116. 5,483.3 3,210.5 0,011.2 751.6 0,360.8
0113. 4,080.5 3,688.3 0,086.0 750.0 0,361.5
0112. 4,824.1 3,201.6 0,286.8 751.2 0,326.1
0115. 4,508.3 3,480.4 0,845.5 7006.2 0,316.0
0114. 1,022.1 2,023.4 0,326.0 7208.5 0,226.6
0111. 1,650.8 2,684.2 0,262.2 7212.2 0,242.1
2000. 1,405.0 2,581.6 0,583.3 7851.3 0,520.2
2000. 1,410.5 2,100.6 0,314.6 7811.0 0,540.8
2002. 00,064.4 5,011.8 0,335.0 7650.8 0,434.4
2008. 00,800.0 5,213.8 0,208.0 7304.1 0,106.4
2006. 00,253.4 5,320.6 0,550.2 7318.4 0,180.4
2003. 00,141.3 5,510.5 0,458.3 7202.2 0,181.0
2002. 00,216.4 4,021.0 0,102.3 7203.5 0,150.2
2005. 00,328.1 4,232.4 0,401.5 7362.3 2,002.0
Department of Economics Fall 2009
University of California, Berkeley Professor Olney
Problem Set ! Pa"e # of 5
b Cn one graph, plot the annual values of 3, 4, 5, and 67 for 19>0 to 200? Dabel the vertical a)is 9billions of
chained (2000) E: 5ive your graph a title +se a legend to identify 3, 4, 5, and 67
c "hich category of e)penditure F 3, 4, 5, or 67 F shows the fastest average rate of growth since 2000( "hich
category shows the largest amount of growth since then(
The fastest rate of growth is observed in consumption spending, which grows on average between 2 and 2! at
an annual rate of 2."#. $et e%ports had the fastest rate of change at 5.&#, but between 2 and 2! $' was
declining, not growing (becoming more negative, thus a drag on )*+,. Investment spending grew .-# per year on
average and government purchases grew on average by 2.&# annually.
The largest amount of growth was consumption spending, which increased by ./,5/&.0 billion (in real terms,
between 2 and 2!.
It should be no surprise that consumption spending showed the largest amount of growth, since 1 is about !
percent of )*+.
3. (4 points total; point each)
For each activity listed below, indicate where the activity would be recorded on the expenditure side of +; 5#!
accounting 8our choices are 3, 4, 5, 57 (e)ports), 4< (4mports), and 6- (not recorded) Cn your attached pages,
give a brief (one or two sentence) e)planation for each answer

a *161 flu immuni'ation shots produced in the +; are purchased by governments in Asia
Exports (GX)2 The goods, flu shots, are produced in the 3.4. and sold to another country, so they represent
production in the 3.4. in a given period even though they were not purchased here.
b "hen students become sicG with *161 flu, parents stay home from worG to care for them
ot recorded (!)2 The parents are producing a service (health5 childcare,, but it is not transacted in the
market, so it is not counted in )*+.
Department of Economics Fall 2009
University of California, Berkeley Professor Olney
Problem Set ! Pa"e $ of 5
c ;ome parents are unable to taGe time off of worG, so they pay private nurses to care for their sicG children
"ons#$ption (")2 This is the same service as in part b., but now households are paying income to
someone to provide it, so it is counted in )*+ as consumption spending.
d A public school district in 3alifornia purchases several thousand *161 flu immuni'ation shots produced in the
+; to be administered to students
Go%ern$ent spendin& (G)2 A part of the government, a public school district, is purchasing a good.
e 5rocery stores in the +; purchase *161 flu immuni'ation shots produced in the +; to be administered to
their employees
ot recorded (!)2 This is an intermediate good that gets recorded when you buy the final good6
groceries from vaccinated employees.
f Families purchase late) gloves manufactured in 3hina for use in the home
"ons#$ption (") and '$ports ('()) The gloves are final goods because they7re not being used to
produce anything else, but they7re purchased from abroad. Thus they7re recorded twice, once positively,
once negatively, and the net result is 8ero.
g "orGplaces in the +; pay construction worGers to build saniti'ing stations, at which employees can
thoroughly wash their hands before worG
'n%est$ent (')) 1onstruction of most things (houses, offices, saniti8ing stations, is part of investment
spending.
h *ospitals in the +; purchase sanitary disposable face masGs that were manufactured in <e)ico
This is an imported good ('(), so it is recorded under imports. 9ut it7s an intermediate good used in the
production of a final good5service6health care : so the offsetting entry for the final good is not recorded
(!) because this question only asks about the purchase of the masks.
0. 1rank through the calculus;
a +se the rules of natural logs and calculus to show that the rate of growth of a product, ab, is the sum of the
rates of growth of a and b
( ) ( )
b of rate growth a of rate growth
b
time over b
a
time over a
b
dt
db
a
dt
da
dt
db
b dt
da
a
dt
db
db
b d
dt
da
da
a d
dt
b d
dt
a d
dt
b a d
dt
ab d
ab of rate growth
+
=

= +
= +
= +
= +
=
+
= =
/ /
, (ln , (ln
, (ln , (ln
, ln (ln
, (ln
Department of Economics Fall 2009
University of California, Berkeley Professor Olney
Problem Set ! Pa"e % of 5
b +se the rules of natural logs and calculus to show that the rate of growth of a 0uotient, a/b, is the difference
between the rates of growth of a and b
( ) ( )
b of rate growth a of rate growth
b
time over b
a
time over a
b
dt
db
a
dt
da
dt
db
b dt
da
a
dt
db
db
b d
dt
da
da
a d
dt
b d
dt
a d
dt
b a d
dt
b
a
d
b
a
of rate growth

=
=
=
=
=

/ /
, (ln , (ln
, (ln , (ln
, ln (ln
ln
c +se the rules of natural logs and calculus to show that the rate of growth of a variable raised to a power, b
a
, is
a times the rate of growth of b
( )
( )
b of rate growth a
b
time over b
a
b
dt
db
a
dt
db
b
a
dt
db
db
b d
a
dt
b d
a
dt
b a d
dt
b d
b of rate growth
a
a
=

=
=
=
=
=

= =
/
, (ln
, (ln
, ln (
ln