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#### Problem Set #1 ECON 295 [5 pts

###### Economics

Problem Set #1 ECON 295

1. [5 pts.] How is Gross Domestic Product (GDP) defined? What are the two approaches to measure GDP which we discussed in class? Explain when and why an economy’s income must equal its expenditure.
2. [5 pts.] An imaginary economy, Bananaland, produces only bananas and sunscreen and the quantities and prices for 2008 and 2009 are given in the table below. The base year is 2008. Please calculate

[a] NGDP and RGDP in 2008;

[b] NGDP and RGDP in 2009;

[c] GDP deflators in 2008 and 2009, respectively.

1. [5 pts. each] A farmer grows a bushel of wheat and sells it to a miller for \$1.00. The miller turns the wheat into flour and then sells the flour to a baker for \$3.00. The baker uses the flour to make bread and sells the bread to an engineer for \$6.00. The engineer eats the bread.

[a] What is GDP in this economy? Explain.

[b] Value added is defined as the value of a producer’s output minus the value of the intermediate goods that the producer buys to make the output. Assuming there are no intermediate goods beyond those described above, calculate the value added of each of the three producers.

[c] What is total value added of the three producers in this economy? How does it compare to the economy’s GDP? Does this example suggest another way of calculating GDP?

1. [5 pts.] Place each of the following transaction in one of the four components of expenditure:

[a] Boeing sells an airplane to the Air Force.

[b] Boeing sells an airplane to American Airlines.

[c] Boeing sells an airplane to Air France.

[d] Boeing sells an airplane to Amelia Earhart.

[e] Boeing builds an airplane to be sold next year.

1. [5 pts.] How is Gross National Product (GNP) defined? How does GNP differ from GDP? Which one is the better measure of economic well-being of a country?

1. [5 pts.] How does chain-weighted measure of real GDP work? Why did the Bureau of Economic Analysis think that the chain-weighted measure of real GDP is better than the traditional measure? According to the data in the table below, please compute RGDP in 2020 and 2021, respectively, by using the chain-weighted measure.
 Year Apple Pizza Price Quantity Price Quantity 2019 \$4 50 \$6 200 2020 \$8 100 \$14 160 2021 \$10 120 \$10 180

1. [5 pts.] NA
1. [5 pts.] Suppose that the year you were born someone bought \$100 of goods and services for your baby shower. How much would you guess it would cost today to buy a similar amount of goods and services? Now find data on the consumer price index and computer the answer based on it. (Use the BLS’s inflation calculator here: http://www.bls.gov/data/inflation_calculator.htm)

1. [5 pts.] Suppose that people consume only three goods, as shown in this table:
 Tennis Balls Golf Balls Battles of Gatorade 2011 price \$2 \$4 \$1 2011 quantity 100 100 200 2012 price \$2 \$6 \$2 2012 quantity 100 100 200

[a] What is the percentage change in the price of each of the three goods?

[b] Using a method similar to the consumer price index, compute the percentage change in the overall price level.

[c] If you were to learn that a bottle of Gatorade increased in size from 2011 to 2012, SHOULD that information affect your calculation of the inflation rate? If so, how? Does it actually affect inflation rate in reality? If not, is the reported inflation rate overstated or understated?

[d] If you were to learn that Gatorade introduced new flavors in 2012, SHOULD that information affect your calculation of the inflation rate? If so, how? Does it actually affect inflation rate in reality? If not, is the reported inflation rate overstated or understated?

1. [5 pts.] What are the three steps that a government follows in order to construct the CPI in reality? Why does the Consumer Expenditure Survey matter?

1. [5 pts.] What are the three differences between CPI and GDP deflator? Briefly explain your answer.

1. [10 pts.] A small nation of ten people idolizes the TV show American Idol. All they produce and consume are karaoke machines and CDs, in the following amounts:
 Karaoke Machines CDs Quantity Price Quantity Price 2020 15 \$50 60 \$12 2021 20 75 80 18

[a] Using a method similar to the consumer price index for both years, compute the percentage change in the overall price level. Use 2020 as the base year, and fix the basket at 1 karaoke machine and 4 CDs.

[b] Using a method similar to the GDP deflator for both years, compute the percentage change of the overall price level. Also use 2020 as the base year.

[c] Is the inflation rate in 2021 the same using the two methods? Explain why or why not.

1. [5 pts.] Why does the historical data show that the CPI is more volatile than the core CPI? Based upon Paul Krugman’s article, Additional Reading Material #2 available on Moodle, briefly explain why the core CPI might be informative for the Federal Reserve (or the central bank).

1. [5 pts.] If your monthly wage is \$3,000 in 2010 and the CPI in 2010 is 218. Now suppose that your boss and you reach an agreement that the expected CPI in 2011 is 220 and your monthly wage is indexed for inflation. What will be your monthly wage in 2011? [Please show your work for full credit. Do not skip the middle steps.]

1. [5 pts.] List the three categories used by the Bureau of Labor Statistics to classify each adult (16 years of age and older) in the economy. How does the Bureau compute the unemployment rate?

1. [5 pts.] Describe the two ways the Bureau of Labor Statistics measures total employment.

1. [5 pts.] The Bureau of Labor Statistics announced that in April 2010, of all adult Americans, 139,445,000 were employed, 15,260,000 were unemployed, and 82,614,000 were not in the labor force. Use this information to calculate:

[a] the working age (or adult) population;

[b] the labor force;

[c] the labor-force participation rate;

[d] the unemployment rate.

1. [5 pts.] In an imaginary economy where it is stepping into a deep recession, the Bureau of Labor Statistics (BLS) just reports the employment situation in the current month: 10 were employed, 1 was unemployed, and 3 were not in the labor force. Similar to what we did in class, please create a numerical, three-stage example to illustrate why the current unemployment rate could be lower than that in the previous month. [Hint: stage one, two, and three represent pre-recession, the beginning of the recession, and deep recession, respectively. In addition, please make sure that the working-age population stays unchanged through the three stages.]

1. [5 pts.] NA

1. NA

21. [5 pts.] What are three possible circumstances where the data of the establishment survey might be biased? Under each of the circumstances, will it overstate or understate the unemployment situation? Briefly explain your answer.

1. [5 pts.] Given the possibly biased results based upon the establishment survey, why does the Bureau of Labor Statistics keep collecting and reporting the data of the survey?

1. [5 pts.] Over the past six decades, the labor force participation rate of men gradually declined whereas that of women significantly rose, leading to a diminishing gap between them. Describe possible reasons for this change. What would you expect the trend of the labor force participation rates of men and women in the future? Briefly explain your answer.

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