Download Solution 1 - Intermediate Macroeconomics

Intermediate Macroeconomics
Instructor Min Zhang
Problem Set 1 Answer
1. What is the di¤erences between GDP and GNP? Give an example.
Ans: GDP is the dollar (or euro, etc.) value of all the goods and services
that an economy produces during a speci…ed period, such as a year. GNP is the
value of goods and services produced by domestic factors of productions. GNP
is equal to GDP (domestic production) plus net factor payments from abroad.
Net factor payments represent income for domestic residents that are earned
from production that takes place in foreign countries.
For example, the value of goods produced by a Japanese plant in China
should be viewed as GDP, not GNP for China, but GNP, not GDP for Japan.
2. In year 1 and year 2, there are two products produced in a given economy,
computers and bread. Suppose that there are no intermediate goods. In year 1,
20 computers are produced and sold at $1000 earch, and in year 2, 25 computers
are sold at $1500 each. In year1, 10,000 loaves of bread are sold for $1.00 each,
and in year 2, 12,000 loaves of bread are sold for $1.10 each.
(a) Calculater nominal GDP in each year.
(b) Calculater real GDP in each year and the percentage increase in real
GDP from year 1 to year 2 using year 1 as the base year.
(c) Calculate the implicit GDP price de‡ator and the percentage in‡ation
rate from year 1 to year 2 using year 1 as the base year.
Ans: Price and quantity data are given as the following.
Good
Computers
Bead
Year 1
Quantity
20
10,000
Price
$1,000
$1.00
Good
Computers
Bead
Year 2
Quantity
25
12,000
Price
$1,500
$1.10
(a) Year 1 nominal GDP=20 $1; 000 + 10; 000 $1:00 = $30:000:
Year 2 nominal GDP= 25 $1; 500 + 12; 000 $1:10 = $50; 700:
(b) With year 1 as the base year, we need to value both years’production
at year 1 prices. In the base year, year 1, real GDP equals nominal GDP equals
$30,000. In year 2, we need to value year 2’s output at year 1 prices. Year 2
1
real GDP=25 $1; 000 + 12; 000 $1:00 = $37; 000:The percentage change in
real GDP equals($37; 000 $30; 000)=$30; 000 = 23:33%:
(c) To calculate the implicit GDP de‡ator, we divide nominal GDP by real
GDP, and then multiply by 100 to express as an index number. With year 1 as
the base year, base year nominal GDP equals base year real GDP, so the base
year implicit GDP de‡ator is 100. For the year 2, the implicit GDP de‡ator is
($50; 700=$37; 000) 100 = 137:0:The percentage change in the de‡ator is equal
to 37.0%.
3. Assume an economy with a coal producer, a steel producer, and some
consumers (there is no government). In a given year, the coal producer produces
15 million tons of coal and sells it for $5 per ton. The coal producer pays $50
million in wages to consumers. The steel producer uses 25 million tons of coal
as an input into steel production, all purchased at $5 per ton. Of this, 15
million tons of coal comes from the domestic coal producer and 10 million tons
is imported. The steel producer produces 10 million tons of steel and sells it
for $20 per ton. Domestic consumers buy 8 million tons of steel and 2 million
tons are exported. The steel producer pays consumer $40 million in wages. All
pro…ts made by domestic producers are distributed to domestic consumers.
(a) Determine GDP using the product approach, the expernditure approach
and the income approach.
(b) What is GNP in this economy? Dertermine GNP and GDP in the
case where the coal producer is owned by foreigners, so that the pro…ts of the
domestic coal producer go to foreigners and are not distributed to domestic
consumers.
Ans:
(a) Coal producer, steel producer, and consumers.
Product approach: Coal producer produces 15 million tons of coal at
$5/ton, which adds $75 million to GDP. The steel producer produces 10 million
tons of steel at $20/ton, which is worth $200 million. The steel producer pays
$125 million for 25 million tons of coal at $5/ton. The steel producer’s value
added is therefore $75 million. GDP is equal to $75 million+$75 million=$150
million.
Expenditure approach: Consumers buy 8 million tons of steel at $20/ton,
so consumption is $160 million. There is no investment and no government
spending. Exports are 2 million tons of steel at $20/ton, which is worth $40
million. Imports are 10 million tons of coal at $5/ton, which is worth $50 million. Net exports are therefore equal to $40 million-$50 million=$10 million.
GDP is therefore equal to $160 million-$10 million=$150 million.
Income approach: The coal producer pays $50 million in wages and the
steel producer pays $40 million in wages, so total wages in the economy equal
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$90 million. The coal producer receives $75 million in revenue for selling 15
million tons at $15/ton. The coal producer pays $50 million in wages, so the
coal producer’s pro…ts are $25 million. The steel producer receives $200 million
in revenue for selling 10 million tons of steel at $20/ton. The steel producer
pays $40 million in wages and pays $125 million for the 25 million tons of coal
that it needs to produce steel. The steel producer’s pro…ts are therefore equal
to $200 million-$40 million-$125 million=$35 million. Total pro…t income in
the economy is therefore $25 million+$35 million=$60 million. GDP therefore
is equal to wage income ($90 million) plus pro…t income ($60 million). GDP is
therefore $150 million.
(b) As originally formulated, GNP is equal to GDP, which is equal to $150
million. Alternatively, if foreigners receive $25 million in coal industry pro…ts
as income, then net factor payments from abroad are $25 million, so GNP is
equal to $125 million.
4. The following information is about the consumer price index and implicit
GDP price de‡ator:
Year
2000
2001
2002
CPI
100
110
121
Implict GDP de‡ator
95
105
112
(a) Compute the increase in prices in the year 2001 and 2002 according to
the CPI index.
(b) Compute the increase in prices in the year 2001 and 2002 according to
Implict GDP price de‡ator (use 2000 as base year to compute the real GDP).
Ans:
(a) The increase in prices in the year 2001 and 2002 according to the CPI
index is
(121 110)=110 100% = 10%
(b) The increase in prices in the year 2001 and 2002 according to Implict
GDP price de‡ator is
(112 105)=105 100% = 6:67%
5. A survey reveals the following information about the economy. The total
working age population is 100 million. Of these individuals, 60 million are
currently employed. Among the working age individuals with no jobs,10 million
are actively searching for a job, another 10 million do not have a job but got
discouraged and stop searching for a job two months ago. The rest 20 million
are study or working in home activities without being paid, and do not want to
…nd a job.
(a) Calculate unemployment rate in this economy.
(b) Calculate the participation rate in this economy.
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Ans:
(a) unemploymentrate = (10 70) 100% = 14:29%
(b) participationrate = (70 100) 100% = 70:00%
6. Suppose the unemployment rate is 5%,the total working age population
is 100 million, and the number of unemployed is 2.5 million. Determine:
(a) The participation rate;
(b) The labour force;
(c) The number of employed workers.
Ans:
The labour force=2:5million
5% = 50million:
The participation rate
=labourforce/working age population
=50million=100million
= 50%:
The number of employed workers=labour force-unemployed workers
=50million 2:5million
= 47:5millon:
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