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Upstate New York Unemployment Rates - Excel

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					Economics 102 Introductory Macroeconomics
Spring 2004, Professor J. Wissink
Problem Set 3
Due: Monday 3/1 at the start of class.

ANSWERED




1.   Multiple Choice

1) Which of the following items would be included in the flow of payments from firms to households:

     a.   money spent by a family on the purchase of a new car.
     b.   the salary of IBM's chief executive officer.
     c.   a carpenter's income tax payment.
     d.   the salary of a U.S. Senator.

2) An economy which is experiencing rising rates of unemployment and falling rates of total output would
be said to be in a period of:

     a.   inflation
     b.   recession
     c.   stagflation
     d.   hyperinflation

3) The period from approximately 1929 to 1939 in the U.S. was termed a "depression" by economists
because the economy was experiencing persistent:

     a.   high levels of unemployment together with high levels of inflation.
     b.   low levels of unemployment together with low levels of inflation.
     c.   low levels of unemployment together with low levels of national output.
     d.   high levels of unemployment together with low levels of national output.


4) The purchase of foreign-made Mitsubishi automobiles by U.S. consumers would be included in which of
the following payment flows:

     a.   from firms to households.
     b.   from the rest of the world to households.
     c.   from the government to households.
     d.   from households to the rest of the world.


5) Which of the following is the best example of an intermediate good?
   a. a new fighter jet purchased by the government
   b. tires purchased by an automobile manufacturer for installation on a new line of cars
   c. a new saw purchased by a carpenter
   d. screwdrivers purchased by a consumer for home repairs
   e. aprons purchased by restaurant chefs




                                                                                                      PS2, Q1
in which of




              PS2, Q1
2. True, False or Uncertain - explain.

a) Households are both consumers and suppliers of goods and services.

True. Household consume goods and services produced by domestic firms and by foreign firms
(imports). In addition, households supply labor and other inputs to firms for which they receive
wage, interest, dividends and rent.

b) A household that has an income of $150,000 per year always spends $150,000 per year on
consumption.
False. It may spend more or less than $150,000. It it spends more, then it is dissaving while if it
spends less, it is saving.

c) GDP measures the value of a country's output by recording the value of all goods and
services traded that are produced by the factors of production owned by that country's citizens.
False. GDP records the value of all final goods produced. It does not count the value of
intermediate goods (ex. tires sold to automobile manufacturers). Furthermore, GDP counts only
the value of final goods produced by the factors of production within a country. For example, it
excludes output produced by Americans living oversease but includes output produced by
foreigners working in the US.

d) During periods of inflation, the prices of all goods and services are rising.
False. During periods of inflation, the prices of some goods may be rising while the prices of
other goods may be falling. However, some measure of overall price level (ex. GDP deflator,
CPI) must be rising.

e) A lender can protect him or herself against inflation by indexing his or her loans to the inflation
rate.
True. When a loan is indexed, the nominal interest rate rises with inflation, thereby keeping the
real interest rate fixed.

f) Empirical data suggests strongly that consumption varies more around trend over the course
of a business cycle than does investment (in terms of percentage deviation from trend).
False. Consumption varies less around the trend during the course of a business cycle, than
does investment.




                                                                                                         Q2
3. Which of the following transactions would be counted in Gross Domestic Product (GDP)?
If it would not, briefly explain why.

a. The wood you purchase to build yourself bookshelves in your room.
Yes. The wood will be included in GDP, you are the final consumer here taking the wood off
the store shelf.

b. The purchase of IBM stock.
No. It is just a paper transaction, not a productive transaction.

c. An economics textbook you purchase with the intent of selling it after your course is over.
Yes. It doesn't matter that you intend to sell it again after the class is over - it was part of
current production.

d. Rent paid by Japanese tenants to an American who owns apartments in Tokyo.
No. GDP takes into account only goods and services that are produced within the country.

e. The profit-sharing check that an employee receives this year.
Yes.

f. Land purchased by a timber company in Oregon.
No. The land is not a currently produced good (unless it is improved land and then only
count the value of the current improvements). We will also accept that land is not a final
good.

g. The commissions earned by a real estate agent in selling houses.
Yes.

h. The cost of a ticket to attend a concert by the Cayuga Chamber Orchestra.
Yes.




                                                                                                   Q3
4. Suppose the following data apply to the United States for the year 1990 (all figures are in billion of
dollars).

     (1)    Social Security taxes - $20
     (2)    Net interest paid by the government - $110
     (3)    Depreciation - $500
     (4)    Personal consumption expenditures - $3100
     (5)    Rents - $20
     (6)    Government expenditures on goods and services - $975
     (7)    Government transfer payments - $500
     (8)    Personal income taxes - $575
     (9)    Net interest - $390
     (10)   Wages and salaries (before tax) - $2900
     (11)   Personal saving - $1455
     (12)   Corporate profits taxes - $125
     (13)   Indirect taxes less subsidies - $445
     (14)   Corporate profits (after taxes) - $285
     (15)   Gross private investment - $200
     (16)   Net exports - $390

     Assume that all income and expenditure data not listed above is equal to zero.

a)   Compute gross domestic product (GDP) using the expenditure approach.

GDP using the expenditure approach = consumption + gross investment + government expenditures +
net exports.

GDP = (4) + (15) + (6) + (16)
GDP = 3100 + 200 + 975 + 390 = $4,665 billion


b)   Compute national income.

National income = rents + net interest + wages and salaries + corporate profits before taxes.

NI = (5) + (9) + (10) + (14) + (12)
NI = 20 + 390 + 2900 + 285 + 125 = $3,720 billion

c)   Compute gross domestic product (GDP) using the income approach.

GDP using the income approach = national income + depreciation + (indirect taxes - subsidies) + net
factor payments to the rest of the world.

GDP = (5) + (9) + (10) + (14) + (12) + (3) + (13)
GDP = (20 + 390 + 2,900 + 285 + 125) + 500 + 445 = $4,665 billion

d)   In this example, is there any difference between GDP and GNP? Explain.

No In this example, GDP = GNP because there are no net factor payments to the rest of the world.

[For those who calculated GDP = C + S + T, GDP = (4) + (11) + (1) + (8) + (12) - (2) -(7)
= 3,100 + 1,455 + 20 + 575 + 125 - 110 - 500 = $4,665 billion




                                                                                                            Q4
 5. Suppose that the Consumer Price Index (CPI) is calculated using the following fixed basket of
 goods bought by the representative household in 1960.

              2 loaves of bread
              2 pounds of ground beef
              ½ gallon of milk
              ½ dozen (6) apples
              1 dozen (12) eggs

 Suppose further that the typical family's weekly grocery bills in 1960 and in 2003 are as follows:


               1960                                                     2003
                        Total
                       Amount                                              Total Amount
       Item             Spent                              Item                Spent

2 loaves of bread        $0.50                        1loaf of bread           $1.00
2 pounds ground                                       1/4 pound of
       beef              $1.60                         ground beef             $1.00
 1/2 gallon milk         $0.30                      1/4 gallon of milk         $0.80
     6 apples            $0.12                       2 dozen apples            $4.00
  1 dozen eggs           $0.10                            6 eggs               $0.80
                                                    1 pound of pears           $1.00
                                                       3 pounds of
                                                         chicken               $7.00
                                                    1 pound broccoli           $1.00
a) What is the CPI for 1960 and 2003? (Use 1960 as the base year.)

 bundle price1960 *100 = (.50+1.60+.30+.12+.10) * 100 = (2.62/2.62)*100 = 100
 ------------------      --------------------------------
 bundle price1960       (.50+1.60+.30+.12+.10)



bundle price2003 * 100 = (2.00+8.00+1.60+1.00+1.60) * 100 = (14.20)/(2.62) * 100 = 542
------------------        ----------------------------------------
bundle price1960         (.50+1.60+.30+.12+.10)


b) Using the CPI, calculate the average annual inflation rate between 1950 and 1993.

To calculate the average annual inflation rate between 1950 and 1993, first calculate the percentage
change in the CPI (total inflation)

CPI 2003 - CPI 1960                   542 - 100
------------------------------- * 100 = ---------------- * 100 = 442%
     CPI 1960                          100

Next, divide this number by the number of years over which you are averaging:

442%
-------- = 10.3 % average annual inflation rate.
 43

c) Given the changing tastes of consumers between 1960 and 2003, is the CPI an accurate measure
of the change in the cost of living? Explain.


                                                                                                       Q5
The CPI is not always an accurate measure of the cost of living. As you can see from this problem,
people shift their consumption from one good to another in response to price changes (eg. from
ground beef to chicken). The CPI does not reflect this substitution of one good for another because it
is a "fixed-bundle index".




                                                                                                         Q5
6. Collegeville is an isolated community in upstate New York that produces only three goods: pizza,
hamburgers, and beer. Information on population, nominal prices and total output for each good in
the years 1980 and 2003 is given below.

NOTE: THE POPULATION IN BOTH YEARS IS 10,000 people.

a) Calculate nominal GDP for 1980 and 2003.
b) Calculate real (in 1980 dollars) GDP for 1980 and 2003.
c) What is the GDP deflator for 2003? (Use 1980 as the base year.)
d) By what percent has the price level increased between 1980 and 2003?
e) Has the standard of living increased or decreased since 1980? Explain.




                            1980                              2003
                    Price            Output           Price            Output
                     in $          in millions         in $          in millions
  pizza
  slices           $2.50              300             $7.00             350

 burgers           $0.50               1              $0.80             100
   beer
   pints             $1                2              $5.00              2



 a) Calculate nominal GDP for 1980 and 2003.

 Nominal GDP for 1980 is : 300(2.50) + 1(0.50) + 2(1.00) = $752.5 million
 Nominal GDP for 2003 is : 350(7.00) + 100(0.80) + 2(5.00) = $2,540 million

 b) Calculate real (in 1980 dollars) GDP for 1980 and 2003.

 Real GDP for 1980 is : 300(2.50) + 1(0.50) + 2(1.00) = $752.5 million.
 Real GDP for 2003 is : 350(2.50) + 100(0.50) + 2(1.00) = $927 million.

 c) What is the GDP deflator for 2003? (Use 1980 as the base year.)

 Nominal GDP                2540
 -------------------- * 100 = --------- * 100 = 274
 Real GDP                   927

 d) By what percent has the price level increased between 1980 and 2003?

 To calculate the change in price level between 1980 and 2003 in Collegeville, calculate the
 percentage change in the GDP deflator over that time period.

 GDP deflator 2003 - GDP deflator 1980                          274 - 100
 --------------------------------------------------------- * 100 = --------------- * 100 = 174% increase
       GDP deflator 1980                                        100

 e) Has the standard of living increased or decreased since 1980? Explain.

 Lots of questions might arise here. A good thing is that real per capita GDP has increased
 since real GDP increased but the population did not. But there are lots of other questions we
 could ask. Is there more pollution? Is the work week longer or shorter? Is there more or less
 crime? Etc., Etc. But if you use the standard of per capita real GDP, then yes, the standard of
                                                                                                           Q6
crime? Etc., Etc. But if you use the standard of per capita real GDP, then yes, the standard of
living has increased. Real GDP increased by 23% over the interval 1980 to 2003. So real GDP
grew by 1% per year. Not great growth, but better than nothing!




                                                                                                  Q6

				
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