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Chapter 4: Problem 6

State whether each of the following is a stock variable or a flow variable, and explain your answer briefly. a. Total farm acreage in the U.S. b. Total spending on food in China c. The total value of U.S. imports from Europe d. Worldwide iPhone sales e. The total number of parking spaces in Los Angeles f. The total value of human capital in India g. Investment in new human capital in India

Short Answer

Expert verified
a. Stock Variable b. Flow Variable c. Flow Variable d. Flow Variable e. Stock Variable f. Stock Variable g. Flow Variable. This classification is based on the nature of the variables, whether they record a value at a specific point in time (stock) or signify a change over an interval of time (flow).

Step by step solution

01

Understanding The Concept of Stock & Flow Variables

A stock variable is a measure at one specific point in time, and it may be beneficial to think of it as a snapshot. By contrast, a flow variable is measured over an interval of time. Consequently, a flow would be measured per unit of time (for example, dollars per year).
02

Analyzing Each Variable

Let's go through given variables one by one to identify if they are stock or flow variables. a. Total farm acreage in the U.S. b. Total spending on food in China c. The total value of U.S. imports from Europe d. Worldwide iPhone sales e. The total number of parking spaces in Los Angeles f. The total value of human capital in India g. Investment in new human capital in India
03

Classifying the Variables

a. Total farm acreage in the U.S. - This is a stock variable because it represents a measurement at a specific point in time. b. Total spending on food in China - This is a flow variable because it represents the total amount spent over a certain period. c. The total value of U.S. imports from Europe - This is a flow variable since it denotes the import activity over a certain period. d. Worldwide iPhone sales - This is also a flow variable, as it denotes the number of iPhone units sold over a certain period. e. The total number of parking spaces in Los Angeles - This is a stock variable as it refers to a count at a particular point in time. f. The total value of human capital in India - This is a stock variable, as it would denote the value of human capital at a specific point in time. g. Investment in new human capital in India - This would be a flow variable as it denotes the amount invested over a certain period.

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Most popular questions from this chapter

In a study session, one of your fellow students says, "I think our econ text book has a mistake: It shows the supply curve for housing as a vertical line, which implies that a rise in price causes no change in quantity supplied. But everyone knows that if home prices rise, construction firms will build more homes and supply them to the market. So the supply curve should be drawn with an upward slope: higher price, greater quantity supplied." Explain briefly the mistake this student is making.

[Requires appendix.] Suppose you buy a home for \(\$ 400,000\) with a \(\$ 100,000\) down payment and finance the rest with a home mortgage. a. Immediately after purchasing your home, before any change in price, what is the value of your equity in the home? b. Immediately after purchasing your home, before any change in price, what is your simple leverage ratio on your investment in the home? c. Now suppose that over the next three years, the price of your home has increased to \(\$ 500,000 .\) Assuming you have not borrowed any additional funds using the home as collateral, but you still owe the entire mortgage amount, what is the new value of your equity in the home? Your new simple leverage ratio? d. Evaluate the following statement: "An increase in the value of a home, with no additional borrowing, increases the degree of leverage on the investment in the home." True or false? Explain.

In the chapter, you learned that one way the government enforces agricultural price floors is to buy up the excess supply itself. If the government wanted to follow a similar kind of policy to enforce a price ceiling (such as rent control), and thereby prevent black market-type activity, what would it have to do? Is this a sensible solution for enforcing rent control? Briefly, why or why not?

[Requires appendix.] Suppose, as in a previous problem, you buy a home for \(\$ 400,000\) with a down payment of \(\$ 100,000\) and take out a mortgage for the remainder. Over the next three years, the price of the home rises to \(\$ 500,000\). However, during those three years, you borrow the maximum amount you can borrow without changing the value of your home equity. Assume that, at the end of the three years, you still owe all that you have borrowed, including your original mortgage. a. How much do you borrow (beyond the mortgage) over the three years? b. What is your simple leverage ratio at the end of the three years? c. By what percentage could your home's price fall (from \(\$ 500,000\) ) before your equity in the home is wiped out?

[Requires appendix.] Could any combination of home price, mortgage, or further borrowing on a home result in a simple leverage ratio of \(1 / 2 ?\) If yes, provide an example. If no, briefly explain why.
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