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Homework 1 Economics 503 Foundations of Economic Analysis Practice 1. Real Hong Kong Box Office. It is 2004. You are analyzing the profitability of Hong Kong’s movie industry. You hear that Steven Chao’s Kung Fu Hustle is the top grossing Hong Kong film of all time. You are given a list of local gross box office receipts for a number of Hong Kong movies. 1. Kung Fu Hustle 2. Shaolin Soccer 3. First Strike 4. Rumble In The Bronx 5. Infernal Affairs 6. God of Gamblers Return 7. Justice My Foot 8. All's Well, End's Well 9. Thunderbolt 10. Mr. Nice Guy 11. Fight Back to School 12. All for the Winner 13. Drunken Master II 14. God of Cookery 15. God of Gambers II 16. Flirting Scholar 17. All's Well, End's Well 1997 Box Office Revenues HK$60,830,000 HK$60,770,000 HK$57,519,000 HK$56,911,000 HK$55,030,000 HK$52,540,000 HK$49,880,000 HK$48,990,000 HK$45,650,000 HK$45,420,000 HK$43,830,000 HK$41,330,000 HK$40,970,000 HK$40,860,000 HK$40,340,000 HK$40,170,000 HK$40,160,000 Year 2004 2001 1996 1995 2003 1993 1992 1992 1995 1997 1991 1990 1994 1997 1990 1993 1997 Year CPI 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 63.5 70.8 77.4 84.0 90.8 98.7 104.6 110.6 113.5 109.8 106.6 104.8 101.4 99.3 99.3 (Source: www.Asianboxoffice.com) Adjust these for inflation using the Hong Kong CPI. Convert all of these film grosses into 2004 dollars (i.e. use 2004 as the reference year) and rank the films by their grosses in 2004 dollars. 2. You are given some statistical accounts for the country of Fruitopia which produces two goods, Apples and Oranges. The accounts contain information on the price of apples and the price of oranges for the years 1995 to 2005. You are asked to calculate a CPI, nominal GDP, real GDP and the GDP deflator using 1995 as the base year. Note that there is no investment, government spending, exports or imports in Fruitopia so GDP is equal to consumption. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Apples price quantity $1.00 100 $1.10 105 $1.21 110 $1.33 115 $1.46 120 $1.61 125 $1.77 125 $1.95 130 $2.14 135 $2.36 140 $2.59 145 Oranges price quantity $2.00 100 $2.40 105 $2.88 100 $3.46 100 $4.15 100 $4.98 95 $5.97 90 $7.17 90 $8.60 85 $10.32 80 $12.38 75 a. Calculate the CPI. The representative market basket for the Fruitopian consumer is 100 apples and 100 oranges. Calculate the cost of this market basket in 1995. The CPI in subsequent years is the price of this same market basket (100 apples and 100 oranges) relative to price of that basket in the base year (multiplied by 100). b. Calculate the nominal GDP which is the sum of the market value of apples (price × quantity) plus the market value of oranges in each period. c. Calculate real GDP which is the sum of the market value of apples calculated using the 1995 price (1 × quantity of apples) plus the value oranges calculated using the 1995 price (2 × quantity of oranges). d. Calculate the GDP deflator as the ratio of the nominal GDP to the real GDP. e. Calculate the average inflation rate over the period of 1996-2005 using both price measures. Which price index increases the most over time? Explain. Notice that the market basket has switched toward apples whose price has not risen sharply over time. CPI 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 CPI Inflation N/A Nominal GDP Real GDP GDP Deflator GDP Deflator Inflation N/A 3. The demand for widgets is represented as QD = 100 – 8 P and the supply of widgets are given by QS = 40 + 4P. Calculate equilibrium price and quantity. Calculate the change in equilibrium price and quantity if a shift in the demand curve gives a demand schedule of QD = 124 – 8 P. 4. The Organization of Economic Co-operation and Development (OECD) constructs theoretical measures of potential output for most of the G20 countries and some others which are used to develop projections in their semi-annually published Economic Outlook publication. Gather information from the OECD Stats Extract website on the output gap and unemployment rates in 2008 and 2009 from the following website http://stats.oecd.org/index.aspx . On the left hand bar of menus, open the menu marked OECD Economic Outlook and the sub-menu marked OECD Economic Outlook Current and Recent Editions. Click on the link on that menu marked Economic Outlook No 86 - December 2009 - Annual Projections for OECD Countries (or go directly to this link http://stats.oecd.org/Index.aspx?DataSetCode=EO86_MAIN ). Under Current Data Selection, Click on the link marked Variable [0/142]. This should bring up a selection of menus. Open the menu called SUP:Supply Block and check GAP: Output gap of the total economy. Open the menu called LAB: Labour markets and check UNR: Unemployment rate. Choose under Time and Frequency years 2008 and 2009; Choose under Country, 10 countries including Australia, Canada, France, Germany, Italy, Japan , Netherlands, Spain, United Kingdom, and USA. Download the data on the output gap and unemployment rate by country for 2009. Fill in the following chart. Output Gap Unemployment Rate AUS: Australia CAN: Canada FRA: France DEU: Germany ITA: Italy JPN: Japan NLD: Netherlands ESP: Spain GBR: United Kingdom USA: United States Calculate the cross-country correlation between the output gap and the unemployment rate across countries.