Download How to calculate purchasing power of income

Macroeconomics (Skill Development Exercise)
Instructor: Rizwan Ahmad
REAL VERSUS NONMINAL PRICES
Q1. Suppose that nominal price of a burger rose from $15 to in 1990 to $.75 in year 2000.
The CPI in years 1990 and 2000 were 26.8 and 162.2 respectively. Calculate real price of
the burger in 1990 in terms of 2000 dollars
Q2. Suppose that Mr. A borrow Rs. 15000 in year 2004 @ 15% nominal interest rate.
During the year inflation was 10%. Calculate real rate of interest and the amount he paid
in nominal and real terms.
Q3. Suppose that salary of Mr. Fahad in 1960 was $ 80,000, convert Fahad’ salary in
1960 to dollars in 1990 assuming price level in 1990 was 170 and in 1960 was 15.2
Q4 Suppose prices of following commodities rises from year 1 to year 2.
 Rent of apartments.
 Prices of petrol.
 Mercedes imported from Germany.
 F-15 produced for air force.
What would be the effects of increase in price on GDP deflator and CPI in each case?
Q5. The cost of Sunday times was $.05 in 1970 and $0.5 in 1990. The average wage in
manufacturing was $ 3.35 per hour in 1970 and $ 10.28 in 1990.
 By what percentage did the wage rise?
 By what percentage did the price of a newspaper rise.
 In each year, how many minutes does a worker have to work to earn enough to
buy a newspaper?
 Did workers purchasing power in terms of newspapers rise or fall?
Q6. Suppose the following table shows GDP of a country from 1990 to 1993, calculate
GDP growth rate and interpret the result for last year.
Years
GDP
1990
1991
1992
1993
107975060
110750020
113561960
116444160
GDP growth
rate
Q.7 With the help of following schedule, calculate Nominal GDP, Real GDP and GDP
deflator. (Base Year = 1990)
Goods
Price
$2
1
4
A
B
C
Year 1990
Quantity
30
20
10
Price
$3
4
5
Year 2000
Quantity
40
25
20
Price
$2
5
6
Year2003
Quantity
20
25
9
Q. 8 Is it possible to increase employment level without increasing inflation? Explain
your answer.
What is inflation, what are its different types in Pakistan? Explain with the help of
diagram.
What are the causes of inflation? Give measures to control inflation in Pakistan.
How inflation affects the followings
a. Consumers
b. Producers
c. Lenders and borrowers
d. Purchasing power
e. Distribution of income
f. Savers
Following table shows rate of interest and level of savings and investment
Interest rate
5%
6%
7%
8%
9%
Savings
10
20
30
40
50
Investment
50
40
30
20
10
a) Draw curves of Investment and Savings showing rate of interest on Y axis while
Savings and Investment on X axis.
b) What is the equilibrium rate of interest?
c) What is the level of savings and investment at equilibrium rate of interest?
d) Suppose rate of interest in the market is two percent above the equilibrium rate of
interest, what would be the level of savings and investment in this case, how
would it affect the level of National Income, level of employment, Savings and
Investment?
e) Suppose rate of interest is one percent below the equilibrium rate of interest, what
would be the level of savings and investment in this case, how would it affect the
level of National Income, level of employment, Savings and Investment?
f) Suppose there is high inflation rate at 5% rate of interest, what government can do
if he decides to control inflation? Explain your answer.
g) Suppose there is deflation in the economy at 8% rate of interest, what should
government do in order to raise the level of economic activities? Explain your
answer.
Give answer of these questions in your own words
a) It is believe that Pakistani People pay millions of rupees in charity every year, yet
they avoid paying taxes to government. Why?
b) What is the percentage of indirect taxes in total tax collection in Pakistan?
c) How Indirect Taxes affects poor and rich people?
d) How indirect taxes affect the confidence of people over government?
e) In your opinion what should government do to raise the level of tax revenue in
Pakistan? Give at least five suggestions.
Instructor: Rizwan Ahmad
Some examples of Real and Nominal economic variables.
Question 1.
Suppose in 1990, in an economy, price of bread was Rs. 2 and quantity produced during
the period was 150. While Price of pencils was Rs. 1 and quantity produced was 500
What was the value of GDP in the economy?
Suppose in year 1991, same quantity was produced for two goods, but prices due to some
reasons, rose to Rs. 4 and Rs. 2 for bread and pencils respectively.
What is the value of GDP in year 1991?
Does GDP rise in Real terms or nominal terms?
Calculate Real GDP
How to calculate purchasing power of income
Purchasing power of income = (Nominal Income / CPI)*100
Suppose in year one, income of a person was Rs. 30,000. in year 2 his income rises to
Rs.34, 000
Suppose there was no change in prices between two years, how much purchasing power
of person rose (in percentage)?
Now suppose CPI in year 2 rises to 107, calculate real income of person in year 2.