Download ECNS 251 Spring 2013 Homework 7 Answer Key 1. a. Consumption

ECNS 251
Spring 2013
Homework 7 Answer Key
1.
a.
b.
c.
Consumption increases because a refrigerator is a good purchased by a household.
Investment increases because a house is an investment good.
Consumption increases because a car is a good purchased by a household, but
investment decreases because the car in Ford’s inventory had been counted as an
investment good until it was sold.
d.
Consumption increases because pizza is a good purchased by a household.
e.
Government purchases increase because the government spent money to provide a
good to the public.
f.
Consumption increases because the bottle is a good purchased by a household, but
net exports decrease because the bottle was imported.
g.
Investment increases because new structures and equipment were built.
2.
a.
Calculating nominal GDP:
2010: ($1 per qt. of milk  100 qts. milk) + ($2 per qt. of honey  50 qts. honey) = $200
2011: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts. honey) = $400
2012: ($2 per qt. of milk  200 qts. milk) + ($4 per qt. of honey  100 qts. honey) = $800
Calculating real GDP (base year 2010):
2010: ($1 per qt. of milk  100 qts. milk) + ($2 per qt. of honey  50 qts. honey) = $200
2011: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts. honey) = $400
2012: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts. honey) = $400
Calculating the GDP deflator:
2010: ($200/$200)  100 = 100
2011: ($400/$400)  100 = 100
2012: ($800/$400)  100 = 200
b.
Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2011 = [($400 – $200)/$200]  100% = 100%.
Percentage change in nominal GDP in 2012 = [($800 – $400)/$400]  100% = 100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2011 = [($400 – $200)/$200]  100% = 100%.
Percentage change in real GDP in 2012 = [($400 – $400)/$400]  100% = 0%.
Calculating the percentage change in GDP deflator:
Percentage change in the GDP deflator in 2011 = [(100 – 100)/100]  100% = 0%.
Percentage change in the GDP deflator in 2012 = [(200 – 100)/100]  100% = 100%.
Prices did not change from 2010 to 2011. Thus, the percentage change in the GDP deflator is
zero. Likewise, output levels did not change from 2011 to 2012. This means that the percentage
change in real GDP is zero.
ECNS 251
Spring 2013
c.
Economic well-being rose more in 2010 than in 2011, since real GDP rose in
2011 but not in 2012. In 2011, real GDP rose but prices did not. In 2012, real GDP did
not rise but prices did.
3.
Year
2009
1999
4.
Nominal
GDP
(billions)
$14,256
$9,353
GDP Deflator
(base year: 2005)
109.8
86.8
a.
The growth rate of nominal GDP = 100%  [($14,256/$9,353)0.10 – 1] = 4.3%
b.
The growth rate of the deflator = 100%  [(109.886.8)0.10 – 1] = 2.4%
c.
Real GDP in 1999 (in 2005 dollars) is $9,353/(86.8/100) = $10,775.35.
d.
Real GDP in 2009 (in 2005 dollars) is $14,256/(109.8/100) = $12,983.61.
e.
The growth rate of real GDP = 100%  [($12,983.61/$10,775.35)0.10 – 1] = 1.9%
f.
The growth rate of nominal GDP is higher than the growth rate of real GDP
because of inflation.
a.
The increased labor-force participation of women has increased GDP in the
United States, because it means more people are working and production has increased.
b.
If our measure of well-being included time spent working in the home and taking
leisure, it would not rise as much as GDP, because the rise in women's labor-force
participation has reduced time spent working in the home and taking leisure.
c.
Other aspects of well-being that are associated with the rise in women's increased
labor-force participation include increased self-esteem and prestige for women in the
workforce, especially at managerial levels, but decreased quality time spent with
children, whose parents have less time to spend with them. Such aspects would be quite
difficult to measure.
5.
a.
Find the price of each good in each year:
Year
2010
2011
Cauliflowe
r
$2
$3
Broccoli
Carrots
$1.50
$1.50
$0.10
$0.20
b.
If 2010 is the base year, the market basket used to compute the CPI is 100 heads
of cauliflower, 50 bunches of broccoli, and 500 carrots. We must now calculate
the cost of the market basket in each year:
2010: (100 × $2) + (50 × $1.50) + (500 × $.10) = $325
2011: (100 × $3) + (50 × $1.50) + (500 × $.20) = $475
Then, using 2010 as the base year, we can compute the CPI in each year:
2010: $325/$325 × 100 = 100
ECNS 251
Spring 2013
2011: $475/$325 × 100 = 146
6.
7.
c.
We can use the CPI to compute the inflation rate for 2011:
(146 – 100)/100 × 100% = 46%
a. introduction of new goods; b. unmeasured quality change; c. substitution bias; d.
unmeasured quality change; e. substitution bias
a.
($2.00 – $0.15)/$0.15 × 100% = 1,233%.
b.
($20.42 – $3.23)/$3.23 × 100% = 532%.
c.
In 1970: $0.15/($3.23/60) = 2.8 minutes. In 2009: $2.00/($20.42/60) = 5.9
minutes.
d.
8.
Workers' purchasing power fell in terms of newspapers.
a.
If the elderly consume the same market basket as other people, Social Security
would provide the elderly with an improvement in their standard of living each year
because the CPI overstates inflation and Social Security payments are tied to the CPI.
b.
Because the elderly consume more health care than younger people do, and
because health care costs have risen faster than overall inflation, it is possible that the
elderly are worse off. To investigate this, you would need to put together a market basket
for the elderly, which would have a higher weight on health care. You would then
compare the rise in the cost of the "elderly" basket with that of the general basket for CPI.