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1. Price indices and national income accounting. 4 points
Consider a closed economy that produces two goods: cars and bread.
Year 2000
Year 2001
Price of a car
20,000 euro
21,000 euro
Price of a loaf of bread
10 kronor
15 kronor
Number of cars produced
100 cars
110 cars
Number of loaves of bread produced
100,000
90,000
Note: A loaf of bread is one piece of bread.
a. Calculate nominal GDP for 2000 and nominal GDP for 2001.
b. Calculate real GDP for 2001 (in 2000 year prices). By how many percent did real GDP
increase between 2000 and 2001?
By how many percent did the general price level increase according to the GDP-deflator?
Note: The GDP-deflator is a Paasche price index.
c. Calculate the value of CPI for 2001 when assuming that CPI for the year 2000 equals 100.
By how many percent did the general price level increase according to CPI?
Note: The CPI is a Laspeyres price index.
Svar:
1. a. GDP(2000)=(20,000*100)+(10*100,000)=2,000,000 + 1,000,000=3,000,000.
GDP(2001)=(21,000*110)+(15*90,000)=2,310,000 + 1,350,000=3,660,000.
b. GDP 2001 in 2000 year prices =
=(20,000*110)+(10*90,000)=2,200,000 + 900,000=3,100,000.
Percentage increase in real GDP = (3,100,000-3,000,000)/3,000,000=0.03333.
In other words, real GDP increases by 3.33 percent between 2000 and 2001.
The GDP-deflator in 2001= Nominal GDP in 2001/Real GDP in 2001=
3,660,000/3100,000=1.18
The price level increases by 18 percent according to the GDP-deflator.
Note: a paasche index uses quantities of the final year as weights.
c. CPI (2001) = ((21,000*100)+(15*100,000))/ ((20,000*100)+(10*100,000))=
(2,100,000 + 1500,000)/3,000,000=3600,000/3000,000=1.2
The price level increases by 20 percent according to the CPI-index.
Question 2: 4 points
Fill in all numbers where there now are question marks (?) in the table.
Private consumption (C)
?
Government purchases= government consumption and
300
governemnt investment(G)
Private investment (I)
150
Trade balance (NX)
400
Labor income before tax and including social security
900
contributions
Capital income before tax
400
Depreciation of capital
100
Indirect taxes (VAT etc.)
200
Net factor incomes from abroad (NFI)
0
Net transfers from abroad
0
Government taxes (including indirect taxes and social
350
Security contributions)
Gross Domestic Product(GDP)
?
Gross National Product(GNP)
?
National saving
?
Public saving
?
Private saving
?
Some of the English terms in Swedish:
GDP = BNP. GNP = BNI. Current Account Balance = bytesbalansen.
Trade Balance = handelsbalansen.
Depreciation of capital = kapitalförslitning.
Students should show their calculations; the way you have arrived at
your answers.
Hint: Start by calculating GDP from the income side rather than from the expenditure side.
Answer:
GDP=GNP = labor income + capital income + depreciation of capital + indirect taxes =
900+400+100+200=1600.
*GDP = C + G+I+NX: 1600 = C + 300 +150+400. C = 1600 – 850=750
* National saving = I + NX = 550.
Private saving = GNP – taxes – C = 1600 – 350 – 750 = 500.
Public saving = taxes – G = 350 – 300=50.
4 points
3. Use the quantity equation for money, which relates nominal money supply (M), the
general price level (P), real GDP (Y), and the velocity of money (V).
A. Calculate the growth rate in Y under the assumption that labor productivity increases by 1
percent and that growth rate of hours worked in the economy is 0.5 percent.
(If you cannot calculate this number invent a number to answer questions b. and c.)
Assume that V is constant and that the central bank has an inflation target of 2 percent.
B. What growth rate of the nominal money stock should the central bank choose to obtain its
inflation target of 2 percent?
C. If the inflation rate in Sweden equals 2 percent whereas it is 20 percent in Polen, what is
the expected percentage change in e (sloty/krona) if the real exchange rate is constant? Use
the concept “ the law of one price”.
Answer: A. 1,5 percent. B. 3.5 percent. C. Appreciation by 18 percent.
1 points
4. Assume that the hourly wage is 100 kronor first of January 1990, and that it is 186 kronor
first of January 2000. Assume also that CPI was 100 first of January 1990, and that CPI is 150
first of January 2000.
Calculate the percentage changes of nominal hourly wage, of the price level, and the real
wage during the 1990s!
Answer: 86, 50 and 36 percent.
6 points
5. Use the Solow-model with the following production function: Y  AK  L1 .
Assume as usual that every person in the economy is a worker. Assume also that the growth
rate in A is zero.
A
4
Saving rate (s)
0.5
0.5

Population growth rate (n)
0.01
0.1
Depreciation rate (  )
N(0)
100
1a. calculate the long-run equilibrium values for capital per worker (k), consumption per
worker (c), production per worker (y), the real wage, and the real return on capital for the two
countries. 1b. Calculate long-run GDP (Y) for the 2 countries. Explain.
If you cannot answer with numbers, explain which country has higher or lower values on the
variables mentioned above for partial credit.
1b. What is the effect on the long-run equilibrium values of k, y, real wage, and the real return
on capital if n increases? No need to calculate with numbers. Who tend to welcome
immigration and whom tend to oppose immigration of workers and employer? Explain why.
1c. What is the effect on the long-run equilibrium values of k, y, real wage, and the real return
on capital if A increases? No need to calculate with numbers.
Svar:
1a.
savum
330
72.66
36.55
36.55
0.01
k=(sA/(n+d))^2
y=Ak^0.5
c=(1-s)*y
W/P=0.5*y
r=
A0.5k^-0.5 - d
1b. k, y, and the real wage decrease, and the real return on capital increases.
1c. k, y, and the real wage increase, and the real return on capital stay constant.
6 points
6. Use the Keynesian model for a small open economy (the Mundell-Fleming model)
To answer the following questions.
Some of the assumptions of this model are:
Equilibrium in the goods market: Y = C(Y-T) + I(r=r*) + G + NX (real exchange rate)
Equilibrium in the money market: M/P = L(r=r*,Y)
Assumption 1: r is the real interest rate and r* is the real interest rate in the rest of the world.
Assumption 2: The domestic price level and the price level in the rest of the world are
constant in the short run.
A. Assume that actual GDP is below full-employment GDP. As a result, the government
decides to simulate aggregate demand by lowering taxes (T).
What will happen in the short run (when the domestic price level and the price level in the
rest of the world are constant) to GDP (Y), private consumption, interest rate, to the
nominal and to the real exchange rate and to the trade balance? Also describe what the
process!
B. Assume that actual GDP is below full-employment GDP. As a result, the government
decides to simulate aggregate demand by increasing the nominal money supply (M).
What will happen in the short run (when the domestic price level and the price level in the
rest of the world are constant) to GDP (Y), private consumption, interest rate, to the
nominal and to the real exchange rate and to the trade balance? Also describe what the
process!
C. Consider what will happen in the long run. Assume that the economy’s GDP is below the
full-employment GDP (Y). What will happen to nominal wage and to the price level?
What happens to GDP, private consumption, private investment, to the real exchange rate and
to the trade balance?