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STUDY OBJECTIVES AND STUDY QUESTIONS
WEEK 1 (JAN 5 - JAN 9)
Topics: Introduction to macroeconomics. What are unemployment and inflation; how are they
measured (including both CPI and GDP deflator), and in what ways are they harmful? What are
GDP and Potential GDP and how do they relate to the business cycle? What is the NAIRU?
Required Reading: part of Chapter 11 AUnemployment, Inflation and National Output@ (pp.
143-148). Supplement A in the Course Handbook.
Study Objectives
1.
To learn how the Labour Force Survey is used to measure unemployment, the
unemployment rate, the employment rate, and the participation rate.
2.
To learn how both the Consumer Price Index and the Gross Domestic Product Deflator
are used to measure changes in the price level and to learn the differences between these
measures.
3.
To understand the main concerns of macroeconomics: unemployment, inflation, business
fluctuations, budgetary and trade balances and economic growth, and to know how each one is
defined.
4.
To understand the chief problems posed by (costs of) unemployment and inflation.
5.
To understand the distinctions between nominal GDP, real GDP and potential GDP and
how to use these terms in the description and analysis of macroeconomic phenomena.
Study Questions
Fill-in-the-blanks
From your reading in the textbook and lectures in class, can you fill in the blanks in the
following statements?
Find places for each of the following words or phrases:
exchange rate, balance of payments, total income claims, national income, constant-dollar, Gross
Domestic Product, output gap, macroeconomics, microeconomics, total production, fluctuations,
structural, inflationary, nominal, price level, current-dollar, labour force, jobs, frictional, business
cycle, potential, actively searching, potential national income, deadweight loss, recessionary,
output, uncertainties, interest, nominal, cyclical, NAIRU, price level, rate, inflation, Consumer
Price Index, purchasing power, labour force, frictional, structural, inflation, wage, savings
account, unexpected, real, normal rate, normal rates
1. ______________ is largely concerned with the behaviour of economic aggregates, such as
total consumption, total investment, and total exports, and the average price of all goods and
services. These aggregates result from activities in many different markets and from the
behaviour of different decision makers in households, governments and firms. In contrast,
______________ deals with the behaviour of individual markets, such as those for wheat, coal or
strawberries, and with the detailed behaviour of individual decision makers, such as firms and
households.
2. The most comprehensive measure of a nation's overall level of economic activity is the value
of its _____ __________ of goods and services, called national product. Since all the value that
is produced must ultimately belong to someone in the form of a claim on that value, the national
product is equal to the _____ ______ ______ generated by the production of goods and services.
Hence, when we study national product, we are also studying ________ ______.
3. The money value of national output is often called _______ national income. Economists
wish to determine the extent to which any change is due to changes in quantities or to changes in
prices. To do this they distinguish between changes in real national income, which occur only
when the quantities of goods and services change, and changes in the _____ _____. Nominal
national income is often referred to as money national income or _______-______ national
income. Real national income is often called ________-______ national income.
4. One of the most commonly used measures of national income is called _____ ________
_______ or GDP.
5. The cyclical behaviour of real national income is reflected in the annual ____________ in the
growth rate of real GDP. The term "________ _____" refers to these short-term fluctuations.
6. Actual national income represents what the economy does, in fact, produce. An important
related concept is _________ national income which measures what the economy could produce
if all resources - land, labour, and productive capacity - were fully employed at their normal
levels of utilization.
7. What is variously called the ______ ___ or the GDP gap measures the difference between
what would have been produced if potential national income (sometimes called highemployment national income or full employment national income) had been produced and what
is actually produced, as measured by the current GDP.
8. The goods and services that are not produced when the economy is operating below
_________ ________ ______ are permanently lost to the economy. Because these losses occur
when employable resources are unused, they are often called the __________ ____ of
unemployment.
9. When the economy is operating below its potential level of output, the output gap is called a
____________ gap. In booms, actual national income may exceed potential income, causing the
______ gap to become negative. Actual income can exceed potential income because potential
income is defined for a ______ ____ of utilization of factors of production, and there are many
ways in which these ______ _____ can be exceeded temporarily. When actual income exceeds
potential income, there is generally upward pressure on prices. For this reason, the output gap is
called an ____________ gap.
10. The Canadian ______ _____ is the total number of adults (aged 15 or over) who are either
employed or unemployed. "Employed" denotes the number of adult workers who hold ____.
"Unemployed" denotes the number of adult workers who are not employed but are ________
_________ for a job. The unemployment rate expresses the number of unemployed as a
percentage of the ______ _____ (not of the total population).
11. At any point in time, there is unemployment due to the normal turnover of labour. Such
unemployment is called __________ unemployment.
12. Unemployment that occurs because of a mismatching of the characteristics of the supply of
labour and the demand for labour, even when the overall demand for labour is equal to the
overall supply, is called __________ unemployment.
13. High employment or full employment is said to occur when the only existing unemployment
is __________ and __________. During recessions, unemployment rises above the minimum
unavoidable amount of frictional and structural unemployment. This excess amount is called
________ unemployment (or, sometimes, deficient-demand unemployment).
14. The measured unemployment rate when the economy is at full employment is often called
the natural rate of unemployment or the _____.
15. To study inflation, economists use two concepts. The first is the _____ _____, which refers
to the average level of all prices in the economy and is indicated by the symbol P. The second is
the ____ of _________, which is the rate at which the general price level is rising.
16. The best-known price index in Canada is the ________ _____ _____ (or CPI) which
measures the average cost of the goods and services that are bought by the average Canadian
consumer.
17. The terms "__________ _____ of money" and "real value of money" refer to the amount of
goods and services that can be purchased with a given amount of money. A change in the price
level affects us because it changes the real value of money. If _________ reduces the real value
of a given sum of money, it also reduces the real value of anything else whose price is fixed in
money terms. Thus, the real value of a money ____, a _______ _______, or the balance that is
owed on a student loan is reduced by inflation.
18. An __________ inflation benefits anyone who has an obligation to pay out money and harms
anyone who is entitled to receive money.
19. Because it is hard to foresee accurately, inflation adds to the _____________ of economic
life. Highly variable inflation rates cause great uncertainty.
20. The ________ rate is the price that is paid to borrow money for a stated period of time and is
expressed as a percentage amount per dollar borrowed. To provide a given expected real rate of
interest, the _______ interest rate must be set at the desired ____ rate of interest plus the
expected annual rate of inflation.
21. The ________ ____ refers to the rate at which different currencies are traded for each other.
22. In order to know what is happening to the course of international trade and international
capital movements, governments keep an account of the transactions among countries. These
accounts are called the _______-__-________ accounts. They record all international payments
that are made for the buying and selling of both goods and services, as well as _________
______ such as stocks and bonds.
ANSWERS TO STUDY QUESTIONS: WEEK 1
1. Macroeconomics is largely concerned with the behaviour of economic aggregates, such as
total consumption, total investment, and total exports, and the average price of all goods and
services. These aggregates result from activities in many different markets and from the
behaviour of different decision makers in households, governments and firms. In contrast,
microeconomics deals with the behaviour of individual markets, such as those for wheat, coal or
strawberries, and with the detailed behaviour of individual decision makers, such as firms and
households.
2. The most comprehensive measure of a nation's overall level of economic activity is the value
of its total production of goods and services, called national product. Since all the value that is
produced must ultimately belong to someone in the form of a claim on that value, the national
product is equal to the total income claims generated by the production of goods and services.
Hence, when we study national product, we are also studying national income.
3. The money value of national output is often called nominal national income. Economists
wish to determine the extent to which any change is due to changes in quantities or to changes in
prices. To do this they distinguish between changes in real national income, which occur only
when the quantities of goods and services change, and changes in the price level. Nominal
national income is often referred to as money national income or current-dollar national income.
Real national income is often called constant-dollar national income.
4. One of the most commonly used measures of national income is called Gross Domestic
Product or GDP.
5. The cyclical behaviour of real national income is reflected in the annual fluctuations in the
growth rate of real GDP. The term "business cycle" refers to these short-term fluctuations.
6. Actual national income represents what the economy does, in fact, produce. An important
related concept is potential national income which measures what the economy could produce if
all resources - land, labour, and productive capacity - were fully employed at their normal levels
of utilization.
7. What is variously called the output gap or the GDP gap measures the difference between what
would have been produced if potential national income (sometimes called high-employment
national income or full employment national income) had been produced and what is actually
produced, as measured by the current GDP.
8. The goods and services that are not produced when the economy is operating below potential
national income are permanently lost to the economy. Because these losses occur when
employable resources are unused, they are often called the deadweight loss of unemployment.
9. When the economy is operating below its potential level of output, the output gap is called a
recessionary gap. In booms, actual national income may exceed potential income, causing the
output gap to become negative. Actual income can exceed potential income because potential
income is defined for a normal rate of utilization of factors of production, and there are many
ways in which these normal rates can be exceeded temporarily. When actual income exceeds
potential income, there is generally upward pressure on prices. For this reason, the output gap is
called an inflationary gap.
10. The Canadian labour force is the total number of adults (aged 15 or over) who are either
employed or unemployed. "Employed" denotes the number of adult workers who hold jobs.
"Unemployed" denotes the number of adult workers who are not employed but are actively
searching for a job. The unemployment rate expresses the number of unemployed as a
percentage of the labour force (not of the total population).
11. At any point in time, there is unemployment due to the normal turnover of labour. Such
unemployment is called frictional unemployment.
12. Unemployment that occurs because of a mismatching of the characteristics of the supply of
labour and the demand for labour, even when the overall demand for labour is equal to the
overall supply, is called structural unemployment.
13. High employment or full employment is said to occur when the only existing unemployment
is frictional and structural. During recessions, unemployment rises above the minimum
unavoidable amount of frictional and structural unemployment. This excess amount is called
cyclical unemployment (or, sometimes, deficient-demand unemployment).
14. The measured unemployment rate when the economy is at full employment is often called
the natural rate of unemployment or the NAIRU.
15. To study inflation, economists use two concepts. The first is the price level, which refers to
the average level of all prices in the economy and is indicated by the symbol P. The second is
the rate of inflation, which is the rate at which the general price level is rising.
16. The best-known price index in Canada is the Consumer Price Index (or CPI) which
measures the average cost of the goods and services that are bought by the average Canadian
consumer.
17. The terms "purchasing power of money" and "real value of money" refer to the amount of
goods and services that can be purchased with a given amount of money. A change in the price
level affects us because it changes the real value of money. If inflation reduces the real value of
a given sum of money, it also reduces the real value of anything else whose price is fixed in
money terms. Thus, the real value of a money wage, a savings account, or the balance that is
owed on a student loan is reduced by inflation.
18. An unexpected inflation benefits anyone who has an obligation to pay out money and harms
anyone who is entitled to receive money.
19. Because it is hard to foresee accurately, inflation adds to the uncertainties of economic life.
Highly variable inflation rates cause great uncertainty.
20. The interest rate is the price that is paid to borrow money for a stated period of time and is
expressed as a percentage amount per dollar borrowed. To provide a given expected real rate of
interest, the nominal interest rate must be set at the desired real rate of interest plus the expected
annual rate of inflation.
21. The exchange rate refers to the rate at which different currencies are traded for each other.
22. In order to know what is happening to the course of international trade and international
capital movements, governments keep an account of the transactions among countries. These
accounts are called the balance-of-payments accounts. They record all international payments
that are made for the buying and selling of both goods and services, as well as financial assets
such as stocks and bonds.
WEEK 2 (JAN 12 - JAN 16)
Topics: How the GDP is measured, and how to interpret this measure of our total production of
goods and services.
Required Reading: Supplement B in the Course Handbook.
Study Objectives
1.
To understand the distinctions between the Expenditure Approach of measuring GDP and
the Income Approach of measuring GDP and how each avoids double counting.
2.
To know the approximate size of GDP in Canada.
3.
To understand the distinctions between GDP and GNP.
4.
To understand the distinction between final goods and intermediate goods and to know
how this distinction is relevant to measuring GDP.
Study Questions
1.
The following data are from Canada's National Accounts for 2002: (all data are in
millions of current dollars)
Personal Consumption Expenditures: Durable Goods
92,131
Semi- and Non-durable Goods
214,552
Services
349,498
Wages, Salaries and supplementary labour income
597,316
Capital Consumption Allowances (i.e., Depreciation)
155,004
Government Expenditures:
218,895
30,430
Current Expenditure
Gross Fixed Capital Formation
Indirect Taxes minus Subsidies
Corporation Profits (before taxes) (includes gov’t enterprises)
Interest and miscellaneous Investment Income
Net Payments of Investment Income to Non-residents
138,197
143,250
49,425
27,389
Investment in Machinery and Equipment
Construction of:
Residential Structures
Non-residential Structures
Inventory accumulation
83,025
65,270
48,469
2,828
Net Income of Non-farm unincorporated businesses (incl. rent)
Net Income of farm operators
Inventory Valuation Adjustment
Exports
Imports
72,960
1,715
-3,561
474,303
423,989
a.
Use the above figures (not all of them; one of them is related to GNP calculation rather
than GDP) to compute GDP by value of final product and by value of the income
received by the factors of production. You should obtain different answers, before
making adjustments, since there is a "statistical discrepancy". What are your two
answers?
b.
The "official" figure for GDP is found by averaging the two estimates you found in (a).
What is GDP computed this way? The difference between this average and the estimate
you found for GDE in (a) is the "statistical discrepancy" (sometimes called the Aresidual
error of the estimate@. How big is it?
c.
Calculate GNP from the data. Why is it different than GDP? Which would you expect to
be larger in Canada and why?
d.
In 1998, GDP was 914,973 million dollars, and in 2002 it was 1,154,859 million dollars.
These are the figures for nominal GDP (i.e., measured in current dollars). However, in
1998 the GDP deflator was 99.6 (1997 = 100.0), while in 2002 it was 107.5. By what
percent did current dollar GDP rise from 1998 to 2002? By what percent did real GDP
rise? What was the rate of inflation between 1998 and 2002?
2.
The following are some of the values for the Consumer Price Index since 1973 (this
version of the index uses 1992 as the base year):
Year 1973
C.P.I. 28.1
1974
31.1
1975
34.5
1976
37.1
1977
40.0
1978
43.6
1979
47.6
1980
52.4
1981
58.9
1982
65.3
1983
69.1
1984
72.1
1985
75.0
1986
78.1
1987
81.5
1988
84.8
1989
89.0
1990
93.3
1991
98.5
1992 1993 1994 1995 1996
100.0 101.8 102.0 104.2 105.9
1997 1998 1999 2000 2001 2002
107.6 108.6 110.5 113.5 116.4 119.0
a.
The C.P.I. rose by 3.4 points between 1974 and 1975 and by 5.2 between 1990 and 1991.
Why do we believe that inflation was more serious in the 1970's than it was in the early
1990's when the C.P.I. rose by more in the early 1990's than it did earlier?
b.
A family friend confides in you that his/her family income after taxes was $20,000 in
1977 and $50,000 in 2000. Is the friend better off or worse off in 2000 and by how much
(in year 2000 dollars)? What was the 1977 equivalent of the current income of $50,000?
What is the 2000 equivalent of the 1977 income of $20,000?
3.
We discussed two price indexes: the Consumer price Index (CPI) being an example of an
index that has fixed quantity weights and the GDP Deflator being an example of an index
that has current quantity weights. Suppose we have an economy (with only consumption
goods and no inventories) in which there are only two goods produced: hamburgers and
bodysuits. The prices and quantities consumed for the years 2001 and 2002 are given in
the following table:
Hamburgers
Bodysuits
Quantity
1000
200
2001
Price
$3.00
$20.00
Quantity
800
400
2002
Price
$2.00
$25.00
a.
Determine current dollar GDP for this economy in 2001 and 2002. By what percentage
does current dollar GDP increase?
b.
If 2001 is the base period, determine 2002 GDP in constant 2001 dollars (i.e., real GDP)
for this economy.
c.
Determine the equivalent of the 2002 GDP deflator (again use 2001 = 100 as the base) in
this economy.
d
Compute the rate of price increase from 2001 to 2002 using the two different price
indexes. Are you surprised about which is larger? Explain.
e.
Are consumers better off or worse off in 2002 (compared with 2001)? Explain.
4-6.
The economy of Xanadu, with only two consumption goods (Widgets and Wombats), and
one capital good (Machines), with no inventory and no imports and exports, has the
following prices and quantities consumed (and produced) in 1991 and in 2001:
1991
Price
Quantity
Widgets
$3.00
200
Wombats
$4.00
150
Machines
$100.00
10
Questions 4 through 6 concern this economy.
2001
Price
$4.00
$3.00
$200.00
Quantity
150
300
5
4. If you were to calculate a price index, like the Consumer Price Index, using 1991 as the
base year, then the value of your price index in 2001, rounded to the nearest integer,
would be:
(A)
100
(B)
169
(C)
113
(D)
111
(E)
125
(F)
178
(G)
104
(H)
109
(I)
150
(J)
91
(K)
116
(L)
123
(M) none of the above
5.
If you were to calculate a Gross Domestic Product price deflator for Xanadu using the
same base year, then the value of this price index in 1991 would be:
(A)
100
(B)
169
(C)
113
(D)
111
(E)
125 (F)
178
(G)
104
(H)
109
(I)
150
(J)
91
(K)
116 (L)
123
(M) none of the above
6.
If we correct the GDP of Xanadu for price increases using the appropriate price index, we
can state that the real value of GDP in Xanadu (the value of Gross Domestic Product in
1991 dollars) rose between 1991 and 2001 (rounded to the nearest integer) by:
(A) 1% (B) 2%
(C) 3%
(D) 4% (E) 5%
F) 7%
(G) 11%
(H) 15%
(I) 20%
(J) between 26% and 30%
(K) between 50% and 69%
(L) between 70% and 75%
(M) between 75% and 100%
(N) the real GDP would fall
(O) none of the above
7-9.
Statisticians in the island nation of Miranda calculate the following magnitudes (all figures
are in dollars; some of the names of the items have been simplified in comparison with the
names used in Canada=s National Accounts).
Personal Consumption Expenditures
54
Net Investment
12
Gross Investment
15
Exports
19
Wages
35
Interest
12
Rent
8
Imports
20
Government Transfers to Individuals
15
Indirect Business Taxes minus Subsidies
14
Investment income paid to non-residents minus
investment income paid to Mirandans from
other countries
12
Government Spending on Goods and Services
10
Statistical Discrepancy
0
7.
What is the value of Gross Domestic Product in Miranda?
(A) $66
(B) $69
(C) $75
(D) $78
(G) $90
(H) $93
(I) $95
(J) $97
(M) $101
(N) $102
(O) $103
(P) $104
(S) $107
(T) $108
(U) $109
(V) $110
(Y) none of the above
(E) $85
(K) $99
(Q) $105
(W) $111
(F) $89
(L) $100
(R) $106
(X) $112
8.
What fraction of Miranda's Gross Domestic Product is made up of depreciation?
(A) 1/3
(B) 1/10
(C) 1/8
(D) 1/6
(E) 1/12
(F) 5/32
(G) 2/30
(H) 1/20
(I) 2/5
(J) 3/8
(K) 1/9
(L) 1/30
(M) 1/4
(N) none of the above
9.
How much is Gross National Product in this economy?
(A) $66
(B) $69
(C) $75
(D) $78
(G) $90
(H) $93
(I) $95
(J) $97
(M) $101
(N) $102
(O) $103
(P) $104
(S) $107
(T) $108
(U) $109
(V) $110
(Y) none of the above
(E) $81
(K) $99
(Q) $105
(W) $111
(F) $89
(L) $100
(R) $106
(X) $112
TRUE-FALSE/EXPLAIN
Indicate whether the following statement is true, false or uncertain and explain briefly, but
carefully, why you think so. The explanation is worth nearly all the marks for this question.
10.
Measuring GDP means measuring the value-added at each stage of the production
process.
11.
The Consumer Price Index is a more accurate price index than the GDP Deflator.
ANSWERS TO STUDY QUESTIONS: WEEK 2
1a)
The final products approach (sometimes called Gross Domestic Expenditure, or the
Expenditure Approach to measuring GDP) adds consumption (called "personal
expenditures"), investment (both "machinery", "construction", and "physical change in
inventories"), government spending, and net exports:

C = 92,131 + 214,552 + 349,498 = 656,181
I = 83,025 + 65,270 + 48,469 + 2,828 = 199,592
G = 218,895 + 30,430 = 249,325
X-IM = 474,303 – 423,989 = 50,314

GDE (Gross Domestic Expenditure) = C + I + G + (X-IM) = 1,155,412 or
$1,155,412,000,000 (before accounting for the statistical discrepancy).
The factor income approach (the Income Approach to measuring GDP) adds the incomes
earned by all the factors that produce all goods and services:

Wages, salaries, etc. = 597,316
Interest and misc. inv. income = 49,425
Rent and non-farm income = 72,960
Farm income = 1,715
Corporation profits = 143,250
Indirect taxes net of subsidies = 138,197
Capital consumption allowance = 155,004
Inventory valuation adjustment = -3,561

GDP = 1,154,306 = $1,154,306,000,000 (before accounting for the statistical
discrepancy).
b)
Official GDP = $1,154,859,000,000
Thus the statistical discrepancy = $553,000,000
c)
GNP = GDP - net payments of investment income to nonresidents
= 1,154,859 – 27,389 = $1,127,470,000,000
Since foreigners (U.S. residents, largely) earn more money in Canada than Canadians earn
abroad, GDP is larger than GNP (since the latter counts only income earned by
Canadians).
d)
Between 1998 and 2002, the increase in current dollar GDP was 1,154,859 - 914,973 =
239,886 million dollars, which is an increase of 26.2%.
In constant 1997 prices, GDP was:
914,973/.997 = 918,647.6 million dollars in 1998;
1,154,859/1.075 = 1,074,287.4 million dollars in 2002;
Real GDP rose by (1,074,287.4 – 918,647.6)/918,647.6 = .169 = 16.9% between 1998 and
2002.
The GDP deflator rose by (107.5 - 99.7)/99.7 = .079 = 7.9% between 1998 and 2002. In
other words, the price level as measured by the GDP deflator rose by 7.9% from 1998 to
2002.
2a)
The rate of inflation for each year (which you were not asked to provide, but which is
interesting) is:
Year
73/74
74/75
75/76
76/77
77/78
78/79
79/80
80/81
81/82
82/83
83/84
84/85
Inflation
rate
10.7%
10.9%
7.5%
7.8%
9.0%
9.2%
10.1%
12.4%
10.9%
5.8%
4.3%
4.0%
85/86
86/87
87/88
88/89
89/90
90/91
91/92
92/93
4.1%
4.4%
4.0%
5.0%
4.8%
5.6%
1.5%
1.8%
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
0.2%
2.2%
1.6%
1.6%
0.9%
1.7%
2.7%
2.6%
2.2%
Although the absolute increase in the CPI was more in 90/91, it is the percentage amount
that is the rate of inflation, not the absolute amount (the percentage increase in 1974/75
was 10.9%, whereas in 1990/91 it was only 5.6%).
b)
In year 2000 prices, the friend's income in 1977 is $20,000 multiplied by 113.5/40.0.
Thus, 1977 income in 2000 prices is $56,750, so real income in 2000 has actually fallen
from $56,750 to $50,000. The 1977 equivalent of 2000 income of $50,000 is
$50,000(40.0/113.5) = $17,261.
3a)
Current dollar GDP in 2001 = 1000x$3 + 200x$20 = $7000
Current dollar GDP in 2002 = 800x$2 + 400x$25 = $11,600
The percentage increase in current dollar GDP is 65.71%
b.
To get the 2002 GDP in 2001 prices, we can calculate the GDP deflator for 2002 and
deflate current dollar GDP to get real GDP. The GDP deflator is given by:
11,600/(800x$3 + 400x$20) = 111.54. Real GDP is therefore 11,600/111.54 x 100 =
10,400.
c.
From section (b) above, the GDP deflator for 2002 is 111.54.
d.
The CPI for 2002 is (1000x$2 + 200x$25)/(1000x$3 + 200x$20) or 7000/7000 x 100 =
100.00. Therefore there was no inflation according to the CPI. At the same time,
the GDP deflator indicates that inflation was 11.5%. Assuming the economy is
experiencing inflation, the CPI normally overestimates the rate of inflation, since it uses
the original bundle of goods and services to do the measurement, before the economy
adjusted to the price change. In this example, the GDP deflator shows a larger rate of
inflation.
e.
Calculating real GDP with the GDP deflator, real GDP increased from $7000 to $10,400.
Using the CPI to correct for price changes, real GDP rose from $7000 to $11,600. By
either measure, consumers are better off in 2002 than in 2001.
4.
For calculating the CPI, we only use the prices and quantities of consumer goods (Widgets
and Wombats), not the prices and quantities of investment goods (Machines). For the
CPI, we take the basket of goods that was consumed in the base year (1991) and see how
the price of this basket changes in future years. The price of this basket in the base year is
3(200) + 4(150) = $1200. In 2001, the price of this same basket of goods is 4(200) +
3(150) = $1250. Thus, the CPI for 1996 is 1250/1200 x 100 = 104.17 The correct answer
is (G).
5.
To calculate the GDP deflator, we use the prices and quantities of all goods - Widgets,
Wombats and Machines. However, this particular calculation is trivial. 1991 is the base
year for the index, and we are asked what is the value of the index in 1991. Naturally, the
value of the index is 100 in the base year. The correct answer is (A).
6.
To calculate the change in real GDP, we need first to calculate the GDP deflator for 2001,
then calculate the value of real GDP in 1991 and 2001. Finally, we can calculate the
percentage change in real GDP between these two years. For the GDP deflator, we use
the current year=s basket of goods to Aweight@ the index. In 2001, this basket of goods
cost 4(150) + 3(300) + 200(5) = $2500. In 1991, this same basket of goods would have
cost 3(150) + 4(300) + 100(5) = $2150. Thus, the GDP deflator for 2001 is 2500/2150 x
100 = 116.28.
Nominal GDP in 2001 is 4(150) + 3(300) +200(5) = $2500. We can deflate this nominal
figure to get real GDP (in 1991dollars) by using the GDP deflator value for 2001 (=
116.28). Real GDP in 2001 is 2500/116.28 x 100 = $2150. Real GDP in 1991 (in 1991
dollars) was 3(200) + 4(150) +100(10) = $2200. Real GDP, measured in 1991 dollars,
therefore fell from $2200 in 1991 to $2150 in 2001. We do not really need to go on and
calculate the percentage change in real GDP. The correct answer is, obviously, (N).
7.
The value of GDP can be calculated using either the Expenditure Approach (C + I + G +
X - IM) or the Income Approach (also called the Factor Payments Approach). We have
all the necessary information to use the Expenditure Approach for this problem.
Consumption is 54, Gross Investment is 15, Government Spending on goods and services
is 10, Exports is 19 and Imports is 20. Calculating 54 + 15 + 10 + 19 - 20 = 78. The
correct answer is (D).
8.
Depreciation (or the Capital Consumption Allowance) reflects that portion of output
devoted to renewing the existing stock of capital goods. It can be measured as the
difference between Gross and Net Investment = 15 - 12 = 3. Depreciation represents 3/78
of GDP in Miranda. The correct answer is (N) - none of the above.
9.
Gross National Product is the value of output produced by factors of production
normally resident in Canada. It can be calculated as GDP minus the investment
income paid to non-residents plus the investment income paid to Mirandans from
their investments in other countries. In other words, 78 - 12 = $66. The correct
answer is (A).
TRUE-FALSE/EXPLAIN QUESTIONS
17.
Statement: Measuring GDP means measuring the value-added at each stage of the
production process.
Answer: TRUE. There are two ways of measuring GDP, the Expenditure Approach
which adds up the (expenditure on the) value of all final goods and services produced this
year. The Income Approach or Factor Payments Approach adds up the incomes (and
associated payments) to all those who contribute to production at each and every stage of
production. This is equivalent to adding up the value-added at each and every stage of
production. Since the two methods of calculating the value of GDP have to come up with
the same answer, you can say that both of these methods effectively measure the valueadded at each stage of production, but by different methods.
18.
Statement: The Consumer Price Index is a more accurate price index than the
GDP Deflator.
Answer: FALSE. Both indexes are imperfect measures of the rate of price increase or
decrease in the economy; there is no perfect measure. The purpose for which the price
index is being used defines which price index is the best one to use for the task. If you
are trying to correct nominal GDP figures (i.e., to calculate real GDP), then you would
obviously be better off using the GDP deflator. This price index covers the whole range
of goods that are in the GDP, whereas the Consumer Price Index only covers the prices of
consumer goods and services. To calculate changes in the cost-of-living of the typical
consumer, the Consumer Price Index will be a better measure. It focuses on the changes
in prices of a basket of about 300 goods and services that are consumed by the average
family in Canada.