Download ECON 222 Macroeconomic Theory I Winter 2015 Assignment 1 Due

ECON 222
Macroeconomic Theory I
Winter 2015
Assignment 1
Due: Drop Box 2nd Floor Dunning Hall by January 26, 2015 at noon
No late submissions will be accepted
No group submissions will be accepted
No “Photocopy” answers will be accepted
Remarks: Write clearly and concisely. Devote some time to give the graphs, plots and
tables a format easy to understand.
The assignment is on 100 points and the first question is worth 25 points. The
second and third questions are worth 35 and 40 points respectively.
Question 1: National Accounting (25 points)
There are only 3 goods sold in the country of Disneya: chocolate, ice cream and smoothies.
The following table shows the amount sold and price of each good:
2010 2011
Chocolate Amount sold 100 125
Price per unit $5
$6
Ice cream Amount sold 125 130
Price per unit $2
$4
Smoothie Amount sold 10
16
Price per unit $5
$4.5
2012
160
$5.5
145
$5
20
$5
2013 2014
140 145
$6
$5
140 100
$4.5 $4
22
25
$4
$4
a) Calculate Disneya’s nominal GDP for each year. By how much has nominal GDP
grown over the period 2010 to 2014?
b) Assume 2010 is the base year and calculate real GDP for each year. By what percentage does real GDP increase in each year compared to the base year? Calculate real GDP
growth for the years 2011 to 2014 and compare with the nominal GDP growth.
c) Calculate the GDP deflator for each year. How much higher, in percentage, is the
overall level of prices in 2012 compared to the base year?
d) Suppose now that the company that sells the chocolate, ice cream and smoothies,
Sweetworld Inc., downsized its operation and stopped producing smoothies in 2014. As a
result, Disneya starts buying packaged smoothies for final consumption from Canada. In
2014, 40 smoothies at a price of $3 were purchased. Given this new information, what is
nominal GDP for the country of Disneya in the year 2014? Assume there are no foreign
businesses in Disneya, and all sales of smoothies from Canada to Sweetworld Inc. are sold
directly to consumers. Sweetworld Inc. does not pay taxes or other fees in Canada.
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Question 2: National Income Accounting (35 points)
This question asks you to retrieve data from CANSIM (Statistics Canada database).
Once you have the data, a spreadsheet program such as Microsoft Excel or Open Office will
work well for our purposes.
You can access CANSIM through the library website by searching for “Cansim” under
“Databases” on the library’s home page. Once you connect to CANSIM @ CHASS, you
should be able to click on “CANSIM Multidimensional View”, and then on “Vital economic
and social statistics” to access the data.
(Note: If you try this from off-campus, you may need to use the Queen’s library webpage
and read ‘help with off-campus access’ if you haven’t already set up a ‘web-proxy’.)
Within the section labelled “Provincial”, retrieve the following series for the indicated
periods Canada, Alberta, British Columbia, and Ontario:
1) GDP per capita in chained 2002 dollars, 1981-2010 (v15855410 )(v15855886) (v15855940
)(v15855724).
2) Unemployment (both sexes 15 years and over, seasonally adjusted), (v2062815) (v2064516)
(v2064705) (v2063949).
3) Consumer prices (v41690973) (v41692327) (v41692462) (v41691919).
a) Plot the GDP per capita in chained 2002 dollar for Canada, Alberta, British Columbia
and Ontario from 1981 to 2010. Plot the four series (over time) in the same graph and briefly
comment on their trends.
b) Plot the unemployment rate of both sexes in Canada and the three provinces from
1980-01 to 2014-11 on the same graph and briefly comment on their trends.
c) Compute the inflation rate for each month from January 2000 to November 2014. Plot
the consumer prices of Canada and the provinces. In a separate graph, plot the inflation
rates of Canada and the provinces. Compare the average inflation between May 2005 to
May 2008 versus the average inflation between April 2008 to May 2014 in Canada and the
provinces.
d) Compare the GDP per capita in provinces in relation with the consumer prices in each
of the province. Does a higher per capita GDP necessarily indicate a better living standard?
Briefly discuss.
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Question 3: Productivity, Output, and Employment (40 points)
This question focuses on labour productivity, labour demand, and generally on the production function. Assume that the aggregate production function is represented by the
following equation:
Y = K α (AN )β + Lγ
Y stands for output, K stands for capital stock, N stands for the number of people
employed, L stands for the quantity of land used in production, and A stands for a measure
of labour efficiency. α, β and γ are parameters whose values are between 0 and 1
a) Derive an analytical expression for the marginal product of capital (MPK), marginal
product of labour (MPN), and marginal product of land (MPL). Then show (analytically)
that for this production function the MPK, MPN and MPL exhibit diminishing returns.
Hint: This involves finding the first and second derivatives of the production function.
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b) Assume that α = β = γ = ; K = 64, L = 100 and A = 16 and labour supply is given
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by:
Ns = w
where w is the real wage rate.
i) Find the labour demand equation. What are the equilibrium levels of the wage rate,
employment, and the level of total output (Y).
√
ii) Suppose now that the labour supply is given by N s = w. Find the new real wage
rate, labour demand and output.
iii) Suppose that the government has imposed a minimum wage of $10. What is the
new level of employment? How does the imposed minimum wage affect employment? Does
the introduction of minimum wage increase the total income of workers (taken as a group)
compared to (ii) above?
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