Week 2 Tutorial Question Solutions (Ch1 & 2)

Transcription

1 Q1: Here are some macroeconomic data for the country of Oz for the years 2011 and Output 12,000 tonnes of potatoes 14,300 tonnes of potatoes Employment 1,000 workers 1,100 workers Unemployment 100 workers 50 workers Total Labour Force 1,100 workers 1,150 workers Prices 2 shekels/tone of potatoes 2.5 shekels/tone of potatoes As the data suggest, Oz produces only potatoes, and its monetary unit is the shekel. Calculate each of the following macroeconomic variables for Oz, being sure to give units. a. Average labour productivity in 2011 and Average labour productivity is output divided by employment: 2011: ,000 = 12 tonnes of potatoes per worker 2012: 14,300 1,100 = 13 tonnes of potatoes per worker b. The growth rate of average labour productivity between 2011 and Average labour productivity = (13 12) % = 8.33% c. The unemployment rate in 2011 and : Unemployment rate = 100 1, % = 9.1% 2012: Unemployment rate = 50 1, % = 4.3% d. The inflation rate between 2011 and Inflation rate = (2.5 2) 2 100% = 25% Week 2 Page 1

2 Q2: Which of the following statements are positive in nature and which are normative? a. A tax cut will raise interest rates. Positive. b. A reduction in the payroll tax would primarily benefit poor and middleclass workers. Positive. c. Payroll taxes are too high. Normative. d. A cut in the payroll tax would improve the federal government s popularity ratings. Positive. e. Payroll taxes should not be cut unless capital gains taxes are cut also. Normative. Q3: In 1993, the debate heated up in Canada about the North American Free Trade Agreement (NAFTA), which proposed to reduce barriers to trade (such as taxes on, or limits to, imports) among Canada, the Unite States, and Mexico. Some people strongly opposed the agreement, arguing that an influx of foreign goods under NAFTA would disrupt the Canadian economy, harm domestic industries, and throw Canadian workers out of work. How might a classical economist respond to these concerns? Would you expect a Keynesian economist to be more or less sympathetic to these concerns than the classical economist? Why? Classical economists suggest that the economy works well on its own and the invisible hand leads people acting in their own interest which leads to efficiency in the economy. Wages and prices adjust very quickly to get to equilibrium. Thus classical economists might in favor of NAFTA because it reduces trading barriers and thus making the invisible hand work even better. Workers will specialize even more and become more productive and efficient. Thus the economy will produce higher level of output. Even though the mix of the industries in these 3 countries might change, they will respond to these changes fairly Week 2 Page 2

3 quickly. Those who lost their jobs due to the changes can quickly find jobs in other industries. Keynesian economists will be more sympathetic to these concerns than classical economists because Keynesian economists suggest that wages and prices adjust slowly, so markets remain out of equilibrium for long period of time. As a result, people in particular industries in a country may become unemployed. Wages won t adjust quickly to restore full employment, so some government action may be desirable. Q4: National income and product data are generally revised. What effects would the following revisions have on consumption, investment, government purchases, net exports, and GDP? a. It is discovered that consumers bought $600 million more furniture than previously thought. This furniture was manufactured in Quebec. Consumption increased by $600 Investment unchanged Net Exports unchanged GDP increased b. It is discovered that consumers bought $600 million more furniture than previously thought. This furniture was manufactured in Sweden. Consumption increased Investment unchanged Net Exports decreased by $600 GDP unchanged Week 2 Page 3

4 Week 2 Tutorial Question Solutions (Ch1 & 2) c. It is discovered that businesses bought $600 million more furniture than previously thought. This furniture was manufactured in Quebec. Consumption unchanged Investment Increased by $600 Net Exports unchanged GDP increased by $600 d. It is discovered that businesses bought $600 million more furniture than previously thought. This furniture was manufactured in Sweden. Consumption unchanged Investment Increased by $600 Net Exports Decreased by $600 GDP unchanged Q5. For each of the following transactions, determine the contribution to the current year s GDP. Explain the effects on the product, income, and expenditure accounts. a. On January 1, you purchase 10 sheets of plywood at $20 per sheet. The lumber store purchased the plywood the previous week at a wholesale price (transportation included) of $15 per sheet. Product approach: lumber store s value added = (20-15) 10 = $50 Income approach: profit to lumber store = (20-15) 10 = $50 Expenditure approach: $200 consumption spending - $150 inventory investment = $50 Week 2 Page 4

5 b. Colonel Hogwash purchases a West Vancouver mansion for $1,000,000. The broker s fee is 6%. Product approach: value of broker s service = $1,000,000 6% = $60,000 Income approach: broker s service income = $1,000,000 6% = $60,000 Expenditure approach: $60,000 counts as residential investment made by the home buyer. c. A homemaker enters the workforce, taking a job that will pay $20,000 over the year. The homemaker must pay $8,000 over the year for professional child-care services. Product approach: $20,000 salary + $8,000 child care service = $28,000 Income approach: $20,000 compensation for homemaker + $8,000 income to the factors that producing the child care (employee s wage, interest, taxes, profits) = $28,000 Expenditure approach: $8,000 consumption spending on child care services + $20,000 in categories that depend on what job the homemaker has. d. The Japanese build an auto plant in Quebec for $1,000,000, using only local labour and materials. (Hint: the auto plant is a capital good produced by Canadians and purchased by the Japanese.) Product approach: $1,000,000 of a capital good Income approach: $1,000,000 paid to Canadian factors of production Expenditure approach: $1,000,000 net exports, since the plant is owned by the Japanese. e. You are informed that you have won $3,000,000 in Lotto 6/49, to be paid to you, in total, immediately. Week 2 Page 5

6 Product approach: $0 because nothing is produced. Income approach: $0 because this is not a payment to a factor of production, just a transfer. Expenditure approach: $0 because this is a transfer, not a government purchase of goods or services. f. The Lottery corporation pays you an additional $5,000 fee to appear in a TV commercial publicizing the provincial lottery. Product approach: $5,000 worth of advertising services. Income approach: $5,000 compensation of employees. Expenditure approach: $5,000 of government purchases. g. Discount Car Rental replaces its rental fleet by buying $1,000,000,000 worth of new cars from General Motors. It sells its old fleet to a consortium of used-car dealers for $40,000,000. The consortium resells the used cars to the public for a total of $60,000,000. Product approach: $100 million of new cars produced + $20 million of sales services provided by the consortium = $120 million Income approach: $100 million to the factors of production of GM + $20 million in payments to the factors of production and profits for the consortium = $120 million Expenditure approach: $100 million by Discount Car Rentals as investment + $60 million by the public for consumption of the used cars $40 million of investment goods sold by Discount Car Rentals = $120 million Week 2 Page 6