Reference no: EM133359340

1. How do economists use a basket of goods and services to measure the price level?

Why does "substitution bias" arise if we calculate the inflation rate based on a fixed basket of goods?

Why does the "quality/new goods bias" arise if we calculate the inflation rate based on a fixed basket of goods?

2. 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

3. 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.

Calculate the U.K. merchandise trade deficit for 2001.

Calculate the current account balance for 2001.

Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.