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Syracuse University
Department of Economics
Wayne A. Grove
Spring 2002
ECN 102: Introductory Macroeconomics
Problem Set #2: Suggested Answers
Grading instructions:
Five questions were graded. They are listed here with the points for each: #3 (22 pts = 11x2pts), #6 (5pts), #8
(12pts=4x3pts), #10 (18pts=9x2pts), and #12 (14pts). Those total 71 pts. The remaining 29pts were given
for simply providing an answer for the remaining seven questions (4pts each).
I. GDP
1. Chapter 6, Problem Set # 3: Nominal GDP gives us the dollar value of new production, but this number
may not give us a good picture of what is happening to the economy’s “real” level of output. If prices rise,
nominal GDP can be higher in year 2 than in year 1 even if output has not increased.
2. Chapter 6, Problem Set # 5: Double counting occurs when intermediate goods are counted directly in
calculating GDP. This means these intermediate goods will be counted more than once because they are also
counted as part of the value of the final product. Total sales includes sales of intermediate goods that firms sell
to each other. GDP includes only the sale of final goods and services.
3. Chapter 6, Problem Set # 9: (a) not counted—financial transaction; (b) counted—investment spending, (c)
not counted—financial transaction; (d) not counted—financial transfer; (e) counted—consumption spending;
(f) not counted—used goods (unless you are in the book-rental business, and declare your income to the
government; (g) not counted—transfer payment; (h) counted—investment spending; (i) counted—
consumption (the cheese is part of the value of the final good); (j) not counted—nonmarket activity; (k) not
counted—illegal goods.
4. Chapter 6, Problem Set # 11: Consumption, investment, and government spending (C, I, and G) include
expenditures on goods produced both domestically and by foreigners, and so C  I  G overstates domestic
production. Imports have to be subtracted out to obtain the correct figure.
5. Crime and pollution are important.
II. Unemployment
6. Chapter 7, Problem Set #3. If one million unemployed people dropped out of the labor force, employment
would remain the same as it was in 1999, 133.5, but unemployment would drop to 4.9 giving an
unemployment rate of 4.9/138.4 = .035 or 3.5%.
7. Chapter 7, Problem Set #9: Yes, both statements can be true. The labor force of Tappania may have grown
faster than the number of employed, implying an increase in the number of people who are looking for work
but not working, and an increase in the unemployment rate.
8. Chapter 7, Problem Set #13: In March of 2000 the unemployment rate was 135,159,00/140,867,000 = .04 or
4% and the labor force participation rate was 140,867,000/(140,867,000 + 68,187,000) = .67 or 67%. By April
the unemployment rate was lower, at .039 or 3.9% and the labor force participation rate was higher at .675 or
6.75%. These numbers are consistent with the story presented in the box on page 421 that suggests that much
of the increase in employment is from new entrants into the labor force (i.e., people now working who before
were not even in the labor force).
9. The rate of unemployment is unchanged when a company reduces all workers from 50 hour workweeks to
40 hour workweeks but does not fire nor hire anyone. Since real GDP falls but unemployment does not, the
relationship between the unemployment rate and real GDP is not always inverse.
10. a. An accountant at Price Waterhouse -- EMPLOYED. All working people are counted as employed.
b. A homeless man who wants to work but has given up looking after ten straight months of unsuccessful job
search – OUT OF THE LABOR FORCE. Technically, he's a "discouraged worker"; because he's no longer
looking for work, he is no longer counted as unemployed.
c. A full-time college student -- OUT OF THE LABOR FORCE. The student is not working but, as a full-time
student, cannot be counted as part of the labor force.
d. A recent retiree who is checking the help-wanted ads every day in the hope of finding a new job -UNEMPLOYED, because he's not working but is looking for work.
e. A street sweeper who works part time -- EMPLOYED. Even part-time workers are counted as employed.
f. A full-time househusband -- OUT OF THE LABOR FORCE, provided that he's not looking for work.
g. A recent college graduate who has turned down a few job offers in the hope of landing the perfect job, for
which she is still looking -- UNEMPLOYED. Although she evidently has some choice in the matter, she is
unemployed just the same, since she's not working and is still looking for work.
h. A recent college graduate who is looking for a job and has received no offers -- UNEMPLOYED. Anyone
who is looking for work and can't find it is obviously unemployed.
i. A college senior who is currently a full-time student but is looking for a job that starts next summer -- OUT
OF THE LABOR FORCE. Although he is looking for work, he is for now still a full-time student and not yet
available for work, so he is not considered part of the labor force.
11. I imagine structural unemployment would be the hardest type of unemployment to deal with, because that
would mean the services I'm qualified to perform are no longer desired by employers -- i.e., there's a mismatch
between the skills I possess and the skills employers want. Frictional unemployment would surely be the
mildest, since that tends to be very temporary, as
one looks around for the best job in one's field. Cyclical unemployment would be somewhere in between --a
definite hardship because I'd be unlikely to find a job until the recession ended, and I wouldn't know how
much longer the recession would last. On the other hand, if I were cyclically unemployed at least the
government or the Federal Reserve could step in to revive the economy and eliminate my (and others') cyclical
unemployment before long.
III. Long Run Economic Growth
12. “When Nations play leapfrog,” The Economist, Oct. 16th, 1993 (on the webpage)
(a) In paragraph 3 (sorry not paragraph 2 as stated) America’s growth rate was 1.6% GDP per head and 4.2%
for total GDP from 1830-1910.
(b) The two essential factors that explain America’s mass production in the 19th century? (see paragraph 6) are
heavy investment in both physical capital (machinery, buildings, equipment, etc) and education.
(c) South Korea has also heavily invested in both physical capital and education.
(d) While the US benefited from a large domestic market, the South Korean have benefited from access to
global markets.
(e) In contrast to the very positive and hopeful picture of increased worldwide welfare and income
convergence, the basic story that emerged from the “World Growth Rates” tables I handed out on the first day
of class suggests that worldwide income are diverging. Japan, Korea and few other countries are the
exceptions to the general pattern of wider and wider differences in per capita GDP among the world’s citizens.