Problem Set #2 Due in hard copy at beginning of lecture on Friday, February

Transcription

1 Name: Solutions Department of Economics Professor Dowell California State University, Sacramento Spring 2013 Problem Set #2 Due in hard copy at beginning of lecture on Friday, February Important: Place all answers in the indicated spaces. Only your work and answers in the indicated spaces will be graded. All pages must be in order and stapled together. 1. Define Gross Domestic Product Definition of Gross Domestic Product GDP (Gross Domestic Product) is the money value of all newly produced final goods and services produced within a country during a given time period. 2. Define Potential GDP Definition of Potential GDP Potential GDP is the output we can produce when our resources are fully and normally employed. 3. Explain how each of the following transactions would affect GDP for the current year. Which spending categories are affected? a. Ford has 10,000 newly produced cars left over at the end of the year and adds them to its inventory. a. This increases GDP for the current year. The change in business inventories component of investment increases. b. The state of California repaves Highway 80. b. GDP increases. The increase is in the government purchases (technically the government consumption and gross investment) component of GDP. Page 1 of 5

2 c. The federal government decides to increase welfare payments. c. This does not affect GDP because it is a transfer payment. Note though that when the recipients ultimately spend the money, the consumption component of GDP will increase d. You take a trip to Mexico for spring break. d. There are two effects here. To the extent that you spend in the U.S. as part of this trip say on airline tickets, GDP increases to the extent you spend in Mexico, GDP decreases. Your spending in Mexico is considered an import of services. Increasing imports reduces the net exports component of GDP. 4. Suppose the data below represents the economic activity of a country in 2010: Spending (or income) Component Value (billions of dollars) Consumption $140 Business Fixed and Residential Construction $27 Inventory Stock at the end of 2009 $10 Inventory Stock at the end of 2010 $5 Depreciation $12 Government Spending $80 Government Purchases $65 Exports $21 Imports $17 Labor Income $126 Capital Income $70 Net Income of Foreigners $5 Taxes, Subsidies and Transfers $28 a. Calculate inventory investment. I = $5 - $10 = -$5 b. Calculate net exports. c. Calculate gross domestic product. NX = $21 - $17 = $4 Y = $140 + ($27-$5) + $65 +$4 = $231 e. Calculate national saving. S = Y C G = $231 = $140 - $65 = $8 Page 2 of 5

3 5. You are given the following data for a hypothetical economy: Use the national income accounting identity to solve for net exports: Y = C + I + G + NX $1,950 = $840 + $650 + $520 + NX => NX = -$60. What is the value of net exports? NX = -$ Given the information in the table below for three consecutive years in a hypothetical economy, calculate the missing data. Year Nominal GDP (in billions of 2002 dollars) Real GDP (in billions of 2002 dollars) GDP Deflator (2002 = 100) Inflation (percent change in GDP deflator) Real GDP per capita (in 2002 dollars) Population (in millions) , , , , , , , , % 25, You are given the following data: Good Quantity in 2005 Price in 2005 Quantity in 2006 Price in 2006 Ice Cream Cones 1,000 $ $3.50 Hot Dogs 500 $ $2.25 Surf Boards 10 $ $ a. Using 2005 as the base year, calculate the growth rate of real GDP from 2005 to Calculate: Y 2005 = (1,000 x $2.50) + (500 x $1.25) + (10 x $100) = $4,125 Y 2006 = (800 x $2.50) + (400 x $1.25) + (14 x $100) = $3,900 $3,900 $4,125 % x % $4,125 Real GDP growth is -5.5% Page 3 of 5

4 b. Suppose the typical consumer s consumption basket is 75 ice cream cones. 50 hot dogs and one surf board. Skip both parts of question 7 part b. We haven t covered it yet. i. Using 2005 as the bas year, calculate the CPI for The value of the CPI in 2006 is ii. What is the inflation rate ate the consumer level from 2005 to 2006? The inflation rate is 8. Based on the information given in question5 on page 262 of the text book a. What is the size of the labor force? LF = 70, ,000 = 80,000 b. What is the unemployment rate? U = (10,000/80,000) x 100 = 12.5% c. What is the natural rate of unemployment for this country? U NAT = [(Structural Unemp. + Frictional; Unemp.)/LF] x 100 = [(3, ,000)/80,000] x 100 = 10% d. Is this economy in an expansion or a recession? Explain. Since the actual unemployment rate at 12.5% is greater than the natural rate of 10% we know there is cyclical unemployment (2.5%), indicating the country is in recession. 9, Based on the information given in question 7 on page 262 of the text book a. What is the labor force participation rate? LFP = (150M/300M) x 100 = 50% b. What is the unemployment rate? U = (10M/150M) x 100 = 6.7% Page 4 of 5

5 c. If five million of the unemployed become discouraged and stop looking for work, what is the new unemployment rate? The number unemployed and labor force both shrink by 5M, so now U = (5M/145M) x 100 = 3.448% U = 3.5% d. Suppose that 30 million jobs are created and this attracts 20 million new people into the labor force. What would be the new rates for labor force participation (LFP) and unemployment (U)? LFP = 56.67% U = 0% Since the population has not changed but 20M more people are in the labor force, the LFP rate increases to (170M/300M) x 100 = 56.67% We originally had 140M jobs (a labor force of 150M but with 10M unemployed). Now though we have 170M jobs and a labor force of 170M implying that there is no unemployment or an unemployment rate of zero. Realize though that as we discussed in class, unemployment will never be zero. There will always be some frictional and some structural unemployment. The purpose of this question is to get you to work through the definitions using simple numbers. Page 5 of 5