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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

Define net exports. How are net exports determined? Explain why net exports might be a negative amount.

What is the difference between gross private domestic investment and net private domestic investment? If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appropriate? 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

Which of the following are included in this year’s GDP? Which are excluded? Explain your answers.

a. Interest received on an AT&T corporate bond.

b. Social Security payments received by a retired factory worker.

c. Unpaid services of a family member who painted the family home.

d. Income of a dentist from the dental services she provided.

e. A monthly allowance that a college student receives from home.

f. Money received by Josh when he resells his nearly brand-new Honda automobile to Kim.

g. The publication and sale of a new college textbook.

h. An increase in leisure resulting from a 2-hour decrease in the length of the workweek, with no reduction in pay.

i. A $2 billion increase in business inventories.

j. The purchase of 100 shares of Alphabet (the parent company of Google) stock.

Suppose that this year’s nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year’s real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.
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