Nur Indah 29119233

EMBA62

MM5006: Assignment Week 5B

1. Draw a diagram of the phases of a business cycle and label each phase. What is the
precise definition of a recession? An expansion?

- Recession is generally considered to be a decline in real output that persist for

more than two consecutive quarters of a year. That means there's a drop in the
following five economic indicators:
 Real GDP
 Income
 Employment
 Manufacturing
 Retail Sales
- A recession is usually underway when there are several quarters of
slowing but still positive growth.
- Often a quarter of negative growth will occur, followed by positive growth
for several quarters, and then another quarter of negative growth
- The first sign of an impending recession occurs in one of the leading
economic indicators such as manufacturing jobs
- Manufacturers receive large orders months in advance. That's measured
by the durable goods order report. If that declines over time, so will
factory jobs. When manufacturers stop hiring, it means other sectors of
the economy will slow.
- Expansion is the phase of the business cycle when the economy moves from a
trough to a peak. It is a period when the level of business activity surges and
gross domestic product (GDP) expands until it reaches a peak

2. The government is contemplating legalizing, and then taxing crack cocaine. Would
the government prefer that the demand for crack be elastic or inelastic? Explain,
using supply and demand diagrams.
- Depends on the government objective of cocaine
- If the government objective is to generate tax revenue as much as
possible, government would prefer the demand to be inelastic. An
inelastic demand or supply curve is one where a given percentage change
in price will cause a smaller percentage change in quantity demanded or
supplied. The market price of crack cocaine would increase from P to Pt
and shift the supply curve from S and St as quantity demanded of crack
cocaine decreases but only slightly from Q to Qt. Therefore, even though
the price of cocaine is increase, supplier will not discourage to supply
cocaine.
Inelastic demand:
ΔQ
- <1
ΔP

- If government objective is to reduce the consumption of cocaine, the

government will prefer to make the demand elastic. Elastic demand is
when price or other factors have a big effect on the quantity consumers
want to buy. If a good or service has elastic demand, it means consumers
will do a lot of comparison shopping. They do this when they aren't
desperate to have it or they don't need it every day. They'll also
comparison shop when there are a lot of other similar choices
- The market price of crack cocaine would increase from P to Pt and shift
the supply curve from S and St as quantity demanded of crack cocaine
decreases a lot from Q to Qt. Therefore, this condition could make
supplier discourage to supply more cocaine.
Elastic demand:
ΔQ
- >1
ΔP
3. In calculating GDP by the expenditure method, there are two ways to avoid the
double counting of intermediate goods. Demonstrate your understanding of these
two methods by showing how both produce the same calculation of contribution to
GDP. Assume the following: 1) Iron ore is produced by iron mining, which is sold to
steel makers for $30 million (we will make the simplifying assumption that iron
mining uses no intermediate goods). 2) The iron ore is all used to make steel, which
is sold to automobile makers for $100 million. 3) The steel is all used to make
automobiles, which are sold to dealers for $250 million. 4) All of the automobiles are
sold by the dealers to consumers for $350 million. What are the two methods, and
what contribution to GDP can be calculated by each method, from the above
assumptions?
- Calculate final sales: measuring production specifically for final user.
Using this method, GDP can be calculated directly from the final user.
Because all of the automobiles are sold by the dealers to consumers for
$350 million, GDP is also $350 million.

- Calculate the GDP based on the value added approach

Step Process Intermediate Value Sales Value Added
Goods
1 Iron Mining 0 30 million 30 million
2 Steel 30 million 100 million 70 million
3 Automobile 100 million 250 million 150 million
4 Dealers 250 million 350 million 100 million
Total 380 million 730 million 350 million

- Method 1 and method 2 has the same value, it is 350 million

4. Calculate the contribution to GDP that would be the result of each of the following
transactions:
(a) The government purchases an airplane for $6 million.
(b) A citizen sells a used car for $6,000.
(c) A citizen sells a used car to a dealer for $6,000, who resells it to a consumer for
$7,500.
(d) A citizen sells a bond for $1,000 that they bought last year for $600.
 (e) The government issues a social security check for $1,250 (ignore the
administrative costs of issuing the check).

GDP can be calculated with the formula -> GDP = C + I + G + (X – M)

C = Consumption
I = Investment
G = Government Purchase
(X-M) = Net Export

(a) The government purchases an airplane for $6 million.

According to GDP for this transaction is $6 million because this is government
purchase, therefore it will add the value of GDP.

(b) A citizen sells a used car for $6,000.

No contribution of GDP ($0) in this transaction because the sale of a used car by
its owner involves no current output.

(c) A citizen sells a used car to a dealer for $6,000, who resells it to a
consumer for $7,500.
In the aspect of consumption, there is a contribution to GDP that $7,500$6,500
= $1,500 after reseling the car (value added)

(d) A citizen sells a bond for $1,000 that they bought last year for $600.
No contribution of GDP ($0) in this transaction since there are only 4 aspect that
can give contribution which are consumption, investment, government purchase,
and net export.

(e) The government issues a social security check for $1,250 (ignore the
administrative costs of issuing the check).
The transfer payment of government is not included in GDP since the society
does not necessarily produce the social security. No production is associated. The
contribution to GDP is therefore $0