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Chapter 7: Q3. (page 152)

A small economy starts the year with \(1 million in capital. During the course of the year, gross investment is \)150,000 and depreciation is \(50,000. What is the economy’s capital stock at the end of the year?

a. \)1,150,000

b. \(1,100,000

c. \)1,000,000

d. \(850,000

e. \)800,000

Short Answer

Expert verified

Option B, $1,100,000.

Step by step solution

01

Meaning of stock of capital

The stock of capital at the end of a year (Kt ) is the sum of the previous year’s capital stock (Kt-1) and the current year’s net investment.

Kt=Kt-1+NetInvestment

The net investment is net capital addition or the difference between total or gross investment and the value of depreciated capital.

Net Investment = Gross Invectment - Value of Depriciation

02

Explanation for choosing option (b)

Given, the previous year capital stock is $1,000,000, gross Investment is $150,000 and depreciation is $50,000. Thus, capital stock at the end will be $1,100,000, as calculated below:

$1,000,000+$150,000-$50,000=$1,100,000

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Most popular questions from this chapter

How do “free” products make the calculation of GDP more difficult? What are hedonic adjustments, and why are they necessary? Will inflation tend to be overstated or understated if quality improvements are not accounted for? Explain

Suppose GDP is \(16 trillion, with \)10 trillion coming from consumption, \(2 trillion coming from gross investment, \)3.5 trillion coming from government expenditures, and \(500 billion coming from net exports. Also suppose that across the whole economy, depreciation (consumption of fixed capital) totals \)1 trillion. From these figures, we see that net domestic product equals:

a. \(17.0 trillion

b. \)16.0 trillion

c. $15.5 trillion

d. none of the above

Suppose that California imposes a sales tax of 10 percent on all goods and services. A Californian named Ralph then goes into a home improvement store in the state capital of Sacramento and buys a leaf blower that is priced at \(200. With the 10 percent sales tax, his total comes to \)220. How much of the \(220 paid by Ralph is in the national income and product accounts as private income (employee compensation, rents, interest, proprietor’s income, and corporate profits)?

a. \)220

b. \(200

c. \)180

d. none of the above

Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions.

Why do economists include only final goods and services when measuring GDP? Why don’t they include the value of the stocks and bonds bought and sold? Why don’t they include the value of the used furniture bought and sold?
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