Reference no: EM131026401

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