An increase in lawlessness causes people to spend more on


Practice Questions 1-

1. Use the following information to answer this set of questions.

Year

Real GDP in 1990 Prices

Price Index

1990

400

100

2000

500

150

a. Calculate the nominal (or money) GDP for 1990 and 2000 using the above information.

b. Calculate Real GDP in year 2000 prices using the above data and your calculations in part (a).

2. Use the following information to calculate the labor cost per unit of output in each of the following cases.

Wage rate Initially = $10 per hour

Output per Labor Hour Initially = 10 units of output

Productivity Gain

Wage Increase

Labor cost/Unit of Output

0%

0%

i)

0%

10%

ii)

0%

20%

iii)

10%

0%

iv)

10%

10%

v)

10%

20%

vi)

20%

0%

vii)

20%

10%

viii)

20%

20%

ix)

a. Fill in the above table i) through ix).

b. What is the relationship between labor cost per unit of output and productivity?  In your answer explain when labor cost per unit of output decreases and when labor cost per unit of output increases.

c. Can real wages in an economy increase if there are no productivity gains?  Explain your answer.

d. How can labor costs per unit of output be reduced?

3. Use the following assumption and information to answer this set of questions.

Assumptions:

i. There is no government spending or taxation in this model.

ii. There is no international trade:  i.e., this is a closed economy.

iii. The level of business saving in this model is equal to zero.

iv. Prices are constant in this model.

Information about Econoland's economy (all figures are in dollars):

 

Year 1 (January 1-December 31)

Year 2 (January 1-December 31)

Production of New Buildings

10

10

Production of New Equipment

20

20

Production of Consumer Goods

220

180

Purchases of Consumer Goods

180

220

Estimated Depreciation on Existing Buildings

20

20

Estimated Depreciation on Existing Equipment

20

20

Inventories of Consumption Goods as of January 1

60

100

Inventories of Consumption Goods as of December 31

100

60

a. In the first year, there are $220 worth of production of consumer goods and only $180 worth of purchases of consumer goods.  How do you explain the difference in these two numbers?

b. Explain the change in inventories that occurs during year 2.

c. Compute the following from the above information:

 

Year 1

Year 2

GDP

 

 

i)  Consumption

 

 

ii)  Gross Investment

 

 

Net Domestic Product (NDP)

 

 

i)  Consumption

 

 

ii)  Net Investment

 

 

Note:  GDP in this example is composed of consumption and gross investment while net domestic product is composed of consumption and net investment (gross investment minus depreciation).

d. Is it possible for a country to have net investment less than zero during a given time period?  Explain your answer.

4. The National Income and Product Accounts (NIPA) provide measures of economic performance.  These measures do have limitations. Please devise an improvement to NIPA for each of the following situations.

a. Firms seeking to increase their production have speeded up their assembly lines.  Although this has increased GDP it has also led to poorer working conditions and higher injury rates. How would you improve the GDP accounts so that this information is factored into the economic statistics?

b. When households and businesses heat their buildings to higher temperatures this increases consumption of electricity and hence GDP.  When households and businesses cool their buildings in hot weather to cooler temperatures this also increases electricity consumption and raises GDP.  How could the GDP accounts be altered to more accurately reflect our national welfare with regard to this scenario?

c. An increase in lawlessness causes people to spend more on protection:  they buy security systems, alarms, dead bolts and weapons. These purchases increase GDP at the same time individual welfare decreases because of the increase in criminal activity. How would you alter the GDP accounts to more accurately reflect national welfare in this scenario?

5. Often in economics we consider the percentage changes in variables. For instance, the percentage change in GDP from one year to the next provides a measure of the growth rate of the economy during that year; or the percentage change in the CPI from one year to the next provides a measure of the inflation rate for the economy during that period of time.  Your text reviews is Chapter 2 two basic rules for working with percentage changes: 1) the percentage change in the product of two variables can be approximated by summing the percentage changes in each of the two variables; and 2) the percentage change in a ratio is the percentage change in the numerator minus the percentage change in the denominator. This problem allows you to practice this technique and compare your approximation with the actual calculation.

a. Use the table below to answer this question:

Year

Nominal GDP=PY

P=GDP deflator

Y=Real GDP

2000

100

1.00

100

2001

 

1.05

110

2002

124.2

 

115

2003

132

1.10

 

i. Fill in the missing cells in the above table.

ii. From the above data, fill in the following table:

Year

Percentage Change in Nominal GDP Using Data from the Nominal GDP column

Percentage Change in P Using Data from the P column

Percentage Change in Y Using Data from the Y column

Percentage Change in Nominal GDP Using Approximation Technique

2000 to 2001

 

 

 

 

2001 to 2002

 

 

 

 

2002 to 2003

 

 

 

 

b. Use the table below to answer this question:

Year

GDP per person

Y=Real GDP

L=population

2000

 

$100 billion

100 million

2001

$1200/person

$150 billion

 

2002

$1500/person

 

130 million

2003

$1200/person

 

125 million

i. Fill in the missing cells in the table.

ii. Now complete the following table.

Year

Percentage Change in GDP/person Using Data from the GDP/person column

Percentage Change in Real GDP Using Data from the Real GDP column

Percentage Change in Population Using Data from the L column

Percentage Change in GDP/person Using Approximation Technique

2000 to 2001

 

 

 

 

2001 to 2002

 

 

 

 

2002 to 2003

 

 

 

 

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