Econ-Assignment1 s

Chapter-2:
1.
GDP measures
a. Total expenditure done within a domestic te
itory of nation during an accounting year or
. Total income earned (wage, rent, profit and interest) by factors of production within a
domestic te
itory of nation during an accounting year.
Since expenditure by one person is income for another person, so total income earned in a economy
equals total expenditure done in that economy within an accounting year. In this way, GDP
measures both expenditure and income at once.
2.
In simple words, consumer price index measure the change in price level of consumer goods and
services (such as, gasoline, transport, food and health care) purchased by households. Specifically, it
measures the change in the prices of a given market basket between two period and hence it helps
in deriving inflation.
3.
Statistic Canada divide everyone into three mutually exclusive classifications- unemployed,
employed and not in labor force.
Deriving unemployment rate:
Unemployment rate = (unemployed/labor force)*100
Note: labor force = (unemployed + employed)
Chapter-2:
4.
a. It is the part of fixed investment done by the government and hence it will be included under
investment expenditure.
. It is the part of fixed investment done by private sector and hence it will be included under
investment expenditure.
c. It will be included in net export because domestic product is being sold to foreign player.
d. It is the part of consumption expenditure because the plan would be used by professional for
private purpose.
e. this would be included in investment expenditure category. This is because it is part of
inventory investment.
Problem6:
a.
2000:
Nominal GDP for 2000 = 50000*100+10*500000 = $10000000
Real GDP for 2000 = 50000*100+10*500000 = $10000000 [as 2000 is the base year]
GDP deflator = (nominal GDP for 2000
eal GDP for 2000)*100 = 100
Consumer price index = 100 [as 2000 if the base year]
2010:
Nominal GDP for 2010 = 60000*120+20*400000 = $15200000
Real GDP for 2010 = cu
ent year quantity at 2000 base price = 50000*120+400000*10 =
$10000000
GDP deflator for 2010 = (nominal GDP for 2010
eal GDP for 2010)*100 =
(15200000/10000000)*100 = 152
Consumer price index (CPI) = [it takes base year quantity as base] =
(100*60000+500000*20)*100/(100*50000+500000*10) = 160
.
Consumer price index is nothing but Laspayers price index:
In 2000, it was 100 but in 2010, it became 160. So rise in price between 2000 and 2010 = (160-
100)/100 = 0.60 or 60% i.e. as per laspayers price index, prices rose by 60% between 2000 and
2010.
Paasche index uses cu
ent year quantity as base. So paasche price index =
(60000*120+20*400000)*100/(50000*120+10*400000) = 152
Inflation = (152-100)*100/100 = 52%. This implies that as per Paasche index price rose by 52%
etween 2000 and 2010.
c.
If I were to choose an index, I would choose CPI for the measurement of inflation. CPI is a best
method for measuring inflation associated with particular set of goods. Whenever inflation is
measured, it is measured for a particular set of reference goods and therefore CPI would be the
most appropriate method for measuring inflation in this case as it uses base year quantity (or
quantity of reference goods) as weight.
7.
Year 1 Year2
Price of red apple Pr = $1 $2
Price of greens apple pg = $2 $1
A.
Consumer price index for year 1 = 100 [as it is the base year]
Consumer price index for year 2 = (price of red apple in year1/price of red apple in year2)*100 =
(2/1)*100 = 200
The consumer price index has increased by 100 (from 100 in period1 to 200 in period2)
B.
Nominal spending on apple in year1 = total expenditure on red apple = 10*1 = 10
Nominal spending on apple in year2 = total expenditure on green apple = 10*1 = 10
It has not changed between the two periods.
C.
Real spending on apple in year1 = total expenditure on red apple = 10*1 = 10
Real spending on apple in year2 = total expenditure on green apple = 10*2 = 20
It has doubled between year 1 and year 2.
D.
GDP deflator in year1 = (real spending on apple in year 1
eal spending on apple in year2)*100 =
100
GDP deflator in year 2 = (real spending on apple in year2
eal spending on apple in year2)*100 =
(20/10)*100 = 200
GDP deflator has doubled from year1 to year2.
E.
If A
y is equally happy in consuming red or green apple, there would not be any change in the true
cost of living. He/she was spending $10 in year1 (in nominal terms) and continues to spending $10
in year2.
The paasche price index (takes cu
ent year quantity as weight) is half of Laspeyres price index
(takes base year quantity as weight).
8.
Real GDP is one of important measure of economic well-being. So if real GDP changes, there would
certainly be change in economic well-being.
a.
If Canada’ wonderland is working, it is likely to generate factor income for the economy. So if a
hu
icane cause Canada’s wonderland to shut down of a month, factor income would fall and
therefore real GDP would fall, thereby negatively affecting economic well-being.
.
Since the productivity of farm harvest has gone up i.e. farm harvest is now generating more wheat,
so real GDP of the economy would rise, causing increase in economic well-being.
c.
The increase in hostility between management and unions are likely to halt (or slow down) the
production process. This means less production would be ca
ied out and therefore GDP will fall. As
a result, there will be fall in economic well-being.
d.
The fall in demand and resulting lay off of worker would not only reduce the production, but also
create unemployment. Therefore there will less generation of income i.e. real GDP will fall and as a
esult, economic well-being of the economy will fall.
e.
The immediate effect of this environmental law is that it would slow down the production process
as firms would be required to
ing changes to their production techniques and sometimes would
e required to reduce their production to adhere to this law. So there would be negative impact on
overall production due to such law and therefore real GDP will fall.
f.
More high-school drop-out is likely to reduce the productivity of workers as now they will less
skilled and trained. Also their capability of doing high level income generating work will fall. All
these would negatively affect real GDP and thereby will cause decline in economic well-being.
g.
Reduction in workweeks means less time is left for production process. As a result production
process will slow down or fall. Hence real GDP will fall and thereby there will be fall in economic
well-being.
Chapeter-3:
1.
There are many factors that determine output an economy produces and some of them are;
a. Availability of resources
. Technology
c. Skill and ability of workers
d. Geographical environment
e. Rules and regulation in the country
f. Political willingness
g. Ability to utilize the available resources and skills
h. Aggregate demand in the economy
i. Employee and management relationship
j. Natural tragedy or disaster.
2.
In order to decide how much of each factor of production to demand, a competitive firm compares
the “additional revenue which that factor would
ing for the firm with “marginal factor cost”.
The additional revenue which a factor would
ing is called marginal revenue product of factor
(MRP), defined as the product of marginal product of factor and marginal revenue whereas the
marginal factor cost is nothing but input/factor price. As long as MRP exceeds input price, the firm
should hire a factor (because in that case the factor would be contributing more than it would be
taking away); and the situation point MRP equals input price, the firm should stop demanding the
factor i.e. the point where MRP = input price, will determine the amount of each factor which a
competitive firm will demand.
4.
Required Co
-Douglas production function: F(K, L) = AK1/4L3/4
Y = F(K, L) = K0.3L0.7
7.
When demand for economy’s goods and services does not equal its supply, there will unplanned
inventory accumulation in the economy, where unplanned inventory accumulation is defined as the
difference between total supply (or income) and aggregate demand.
Suppose demand for economy’s goods and services exceeds its supply, then unplanned inventory
accumulation would be negative i.e. inventory will fall. Noting this, the producers would start
producing more and the aggregate supply would rise to be equal to aggregate demand.
Conversely, suppose demand for economy’s goods and services is less than its supply, then
unplanned inventory accumulation would be positive and there would rise in inventory. Noting
this, the producers would start producing less and aggregate supply would fall to be equal to
aggregate demand.
In these ways, we would say equalization of demand for economy’s goods and services with its
supply.
Chapter-3:
3.
A co
-Douglas function with parameter α = 0.3 can be written as:
Y = F(K, L) = K0.3L0.7
a.
In the competitive market, the compensation of input equals its marginal productivity.
So real rental rate (R/P) = marginal product of capital = dY/dK = 0.3*K-0.7*L0.7
Similarly real wage rate (W/P) = marginal product of labor = dY/dL = 0.7*K0.3 * L-0.3
Hence fraction received by capital in total income =





=

= 0.3 or 30%
And Similarly fraction received by labor in total income =





=

= 0.7 or 70%
.
If labor force rises by 10%, the total output would rise by 7%. It is given by multiplying the share of
labor in total income with labor force increase (in percentage) i.e. 0.7*10 = 7%.
We know rental price of capital (R/P) = 0.3*K-0.7*L0.7, so if labor rises by 10%, the real rental price of
capital is likely to go by 7% (=0.7*10).
Moreover, real wage rate (W/P) = marginal product of labor = dY/dL = 0.7*K0.3 * L-0.3, this implies
that if labor force rises by 10%, real wage rate would fall by 3% [= (-0.3)*10]
c.
If Capital rises by 10%, the total output...