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Problems. Numerical Problems: Ch. 2: 1, 6abc, 8 Ch. 8: 3. Chapter 2 Problem 1. Chapter 2 Problem 1 (Answer).
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Problems Numerical Problems: Ch. 2: 1, 6abc, 8 Ch. 8: 3
Chapter 2 Problem 1 (Answer) • Professor grows coconuts and catches fish. He harvested 1000 coconuts and caught 500 fish. He values 1 fish as being worth 2 coconuts. We assume that this rate of trade defines the relative prices of the two goods. Given this rate of trade, we can value the harvest of the two goods at 1000 fish. • That is 1000 coconuts have the same value as 500 fish, so we have 500 fish, and we have coconuts valued at 500 fish, for total value of of 1000 fish. • I'd like to skip down in the question to a new piece of information. We're told that the professor used 100 fish as fertilizer for the coconut trees. I assume that these 100 fish are used as an intermediate good, and therefore should not be counted in GDP. So although the value of the total harvest of coconuts and fish was 1000 fish, GDP will be 900 fish.
Chapter 2 Problem 1 (Answer, continued) • We're also told that the professor gave 200 coconuts to Gilligan in exchange for help in the harvest and he gave him 100 fish in exchange for collecting worms used in fishing. • The value of 200 coconuts is 100 fish. So the value of Gilligan's income is 200 fish; that is, 100 fish plus 200 coconuts worth 100 fish. • We have already claimed that GDP has been determined, but what about the value of the worms that Gilligan collected? • In fact, these are intermediate goods and should not be included in GDP. • We are also told that the professor stored 100 coconuts in his hut for consumption at some future time. I regard this as inventory investment. The 100 coconuts have a value of 50 fish.
Chapter 2 Problem 1 (Answer, continued) • Now let's see what questions we've already answered and what questions need to be answered. • I've already determined that GDP on Gilligan's Island is equal to 900 fish. • All of that output is consumption except for the 100 coconuts that were stored by the professor. These coconuts, valued at 50 fish, represented inventory investment. So total consumption is equal to 900 less 50, or 850 fish and investment is equal to 50. • Gilligan's income was 200 fish. All remaining income went to the professor, so his income is 700 fish.
Chapter 2 Problem 6a,b,c (Answer) • The problem gives us information about production of goods in an economy in two different years. The table shows production and prices in the base year and also in a later year. • The first question asks us to find nominal GDP in the current year and in the base year and then to determine the percentage increase between the two. • Nominal GDP in the base year is measures the value of base year quantities at base year prices. The total, given in the table, is $56,000. Nominal GDP in the current year is equal to the current year quantities at current year prices, or $200,000. • The percentage rate of change going for 56,000 to 200,000 is 257%.
Chapter 2 Problem 6a,b,c (Answer, continued) • Next we are asked to find real GDP in the current year and in the base year. And then we are asked to find the percentage rate of change in real GDP. • Real GDP and nominal GDP are the same in the base year, so real GDP in the base year is equal to $56,000. Real GDP in the current year is found by valuing current year output at base year prices. The correct figure from the table is $178,000. • The percentage rate of change going from $56,000 $178,000 is 218%.
Chapter 2 Problem 6a,b,c (Answer, continued) • Finally we are asked to find the GDP deflator for the current year and for the base year and then the rate of change in the GDP deflator. • In the base year the GDP deflator has a value of 100. In the current year, the GDP deflator would be equal to nominal GDP divided by real GDP with that quotient multiplied by 100. • Nominal GDP was $200,000 real GDP was $178,000; the quotient is 1.124. Multiply that by 100 to get a GDP deflator of 112.4. • The percentage rate of change in the GDP deflator, which goes from 100 to 112.4, is 12.4%.
Chapter 2 Problem 8 (Answer) • Hy purchases a one year government bond for $500 and one year later receives principal plus interest of $545. The percentage rate of return, which is the nominal rate of interest, is 9%. • The CPI went from 200 to 214 over the same period. That's a percentage rate of increase of 7%. • Hy had been anticipating that the CPI would rise from 200 to 210, which would have been a 5% rate of increase. So Hy was expecting 5% inflation. • Hy's expected real rate of interest was 9% -5% or 4%.
Chapter 8, Analytical Question 3 (Answer) • This question tells us that output, total hours worked, and average labor productivity, are all pro-cyclical. • The question is: Which variable, output or total hours worked, increases by a larger percentage in expansions and falls by a larger percentage in recessions? • Output equals hours times productivity. This implies that, the percentage change in output equals the percentage change in hours multiplied by the percentage change in productivity. • Both hours and productivity rise in an expansion, so the percentage change in output must be larger than the percentage change in hours.
Chapter 8, Analytical Question 3 (Answer, continued) • Yes, this is related to Okun's Law. • We just saw that output varies more in percentage terms than employment does. This is close to what Okun’s Law says. • First assume that a 1% point change in unemployment implies roughly a 1% change in employment (true, since the labor force is about the same size as the number employed). • The answer to the previous question tells us that if employment rises by 1%, output must rise by more that that. • Okun's Law tells us that the output increase is about 2% points, consistent with what is required.
