Homework 2

Homework 2

Due Sunday

Course Objectives: 2a, 2b, 2c, 2d, 2e, 2f, 3a, 3b, 3c

Meaning of Homework: GDP is one of the most important measures in macroeconomics and is probably the most important measure of the standard of living worldwide. You will learn how to calculate GDP, both nominal and real. You will learn how to calculate price changes, using both the GDP Deflator and the CPI. These 4 calculations will be worth a lot of points on Exam 1. You will also learn how to convert a nominal number in to a real number, getting rid of the effects of inflation. For the second part of the homework, you will learn about the business cycle and unemployment.  Just like it is crucial to learn about climate change from scientists rather than politicians and the media, it is very important to learn about the calculation of unemployment from economists because politicians from both parties as well as the media frequently make false statements regarding unemployment when it serves their own interests.

1. You are given the following:

Year Quantity of Cars Price of Cars Quantity of Buses Price of Buses
2013 5 million $20,000 1 million $100,000
2014 5.1 million $22,000 1.2 million $102,000
Base Year = 2013

2a. Calculate nominal GDP for 2013.

2b. Calculate nominal GDP for 2014.

2c. Does the increase in nominal GDP give an accurate indication of the increase in output? Why or why not?

2d. Calculate real GDP for 2014.

2e. Calculate the GDP Deflator to the nearest tenth for 2014.

2f. What does your number in (e) mean?

2g. Calculate the CPI to the nearest tenth for 2014. (Use 2013 as the base year.)

2. Do question 1 from the Self-Check Questions at the end of Chapter 19. Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP?

3. Do question 10 a and b from the Self-Check Questions at the end of Chapter 19. Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. a. The environment becomes dirtier b. The crime rate declines.

4. Convert the nominal wage rates in the following table to real wage rates. The formula is given in the book as Real = (Nominal/(Price Index/100)), although I prefer writing it as Real = (Nominal/Price Index) x 100. Either way gives you the same answer. When you are converting a nominal number into a real number, getting rid of the effects of inflation, your resulting real number should be in the same units as the original nominal number. It should also be in the same general magnitude, unless you are going back hundreds of years of looking at a country that has experienced unusually high rates of inflation. In other words, when you convert the nominal wage rate of $7.25 in to a real wage rate, you should come up with something close to $7.25, such as $4.04 or $9.56. If you get an answer of $.04, then you know you made a mistake.

1976 1981 1989 1997 2006 2010
Nominal Minimum Wage $2.30 $3.35 $3.35 $5.15 $5.15 $7.25
CPI 56.9 90.9 124.0 160.5 201.6 219.2
Real Minimum Wage

5. What is a recession?

6. What causes a recession?

7. What phase of the business cycle are we currently in?

8. If 7 million workers are unemployed and 55 million workers are employed, calculate the unemployment rate. Round to the nearest tenth of a percent.

9. Starting from the previous problem, if 2 million unemployed workers stop looking for work, recalculate the unemployment rate. Round to the nearest tenth of a percent.

10. Starting from the previous problem, if 5 million of the employed workers are moved from full-time to part-time work, recalculate the unemployment rate. Round to the nearest tenth of a percent.

11. When the unemployment rate increases during a recession, why does the increase in the official unemployment rate understate the increase in the unemployment problem?

12. As the unemployment rate has decreased from 10.0% to below 5.0% over the last 8 years, why does the drop in the rate understate the improvement in the labor market?

13. Answer the third question in Chapter 21 from the Review Questions. Are all adults who do not hold jobs counted as unemployed?


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