EC2220 Problem-Set-02 PDF

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EC 2220: Intermediate Macroeconomics I

Baxter Robinson

Week 2 Problem Set Question 1: In a fictional country called Ruralia people only consume corn bread with peanut sauce. Corn farmers produce corn and sell it to the bakers who produce corn bread with it. Peanut farmers grow peanuts, and then make a sauce they sell directly to consumers. The government raises taxes and pays for basic infrastructure like roads, bridges, and water. In year t the following transactions occur: Corn Farmers Total revenue Wages Taxes Increase in Inventory Bakers Total revenue Cost of Corn Wages Taxes Peanut Farmers Total revenue Wages Taxes Consumers Wage Income Profits Taxes Government Tax Revenue Wages

Millions of 15.00 8.00 2.00 1.00 25.00 15.00 4.50 1.00 12.00 8.00 0.50 28.50 13.00 4.50 8.00 8.00

Part A: Calculate GDP according to the expenditure approach. Part B: Calculate GDP according to the value-added approach. Part C: Calculate GDP according to the income approach.

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EC 2220: Intermediate Macroeconomics I

Baxter Robinson

Question 2: In year t + 1 Ruralia starts trading with Urbia. Urbia sells clothing and books, and buys cornbread and peanut sauce from Ruralia. In year t + 1 the following transactions occur: Corn Farmers Millions of Total revenue 17.00 Wages 9.00 Taxes 2.00 Increase in Inventory -2.00 Bakers Total revenue 27.00 Cost of Corn 17.00 Wages 5.50 Taxes 1.00 Peanut Farmers Total revenue 18.50 Wages 12.50 Taxes 3.50 Consumers Wage Income 38.00 Profits 12.00 Taxes 4.50 Government Tax Revenue 11.00 Wages 11.00 Trade with Urbia Imports of Clothes 3.00 Imports of Books 6.00 Exports of Corn Bread 1.50 Exports of Peanut Sauce 7.50 Part A: Calculate GDP in Ruralia in year t + 1 using any approach Part B: Calculate the growth rate from t to t + 1 Part C: In what ways might this new trading relationship have improved welfare in Ruralia?

Part D: In what ways might this new trading relationship have harmed welfare in Ruralia?

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EC 2220: Intermediate Macroeconomics I

Baxter Robinson

Question 3: In the fictional country of Frealand the following final consumer goods are bought in year t: Product Bread Milk Honey Music Boxes Haircuts

Price 1.00 1.45 2.45 50.00 10.00

Quantity 350 210 115 21 63

In year t + 1 the following final consumer goods are bought in year t: Product Bread Milk Honey Music Boxes Haircuts

Price 1.10 1.43 2.53 52.50 12.00

Quantity 335 225 118 27 58

Part A: Calculate GDP in year t. Which approach do you need to use? Part B: Calculate nominal GDP and real GDP in year t + 1 using year t as a base year. What is the inflation rate? Part C: Name at least 2 problems with this measurement of inflation Part D: Calculate GDP growth from year t to year t + 1. Explain whether it makes more sense to use nominal or real GDP.

Question 4: There is an economy with 12,000 people working full-time jobs and 13,000 people working part-time jobs. 5,000 people have no job and are actively searching for work. 7,000 people are unemployed and not searching for work. Part A: Calculate the labour force, the unemployment rate, the participation rate, and the employment rate. Part B: This economy has experienced a bad recession for the previous 3 years. Is the unemployment rate likely to be a good measure of the health of the labour market? Why or why not?

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