Reference no: EM133280390

Part A. Please answer the following questions:
Question 1: How do economists use a basket of goods and services to measure the price level?
Question 2: Why does "substitution bias" arise if we calculate the inflation rate based on a fixed basket of goods?
Question 3: Why does the "quality/new goods bias" arise if we calculate the inflation rate based on a fixed basket of goods?

Part B. Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.
• Living in an especially large country
• Having a domestic investment rate much higher than the domestic savings rate
• Having many other large economies geographically nearby
• Having an especially large budget deficit
• Having countries with a tradition of strong protectionist legislation shutting out imports

Part C. In 2001, the United Kingdom's economy exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of income from abroad were £140 billion while income payments going abroad were £131 billion. Government transfers from the United Kingdom to the rest of the world were £23 billion, while various U.K government agencies received payments of £16 billion from the rest of the world.