Intermediate Macroeconomics: Homework 1

Exercise 1:  GDP in the Bureau of Economic Analysis (www.bea.gov)

Feel free to choose any spreadsheet software you are comfortable with. Go to www.bea.gov and download the sequence of nominal GDP (Table 1.1.5), the GDP deflator (Table 1.1.9), Compensation of Employees (Table 1.10), Net Operating Surplus (Table 1.10), Consumption of Fixed Capital (Table 1.10) and Proprietors’ Income (Table 1.10).  Use as many years as you can get.

a) Construct and plot in the same graph the sequence of nominal GDP and the sequence of real GDP at prices of the most recent year.

b) Plot the sequence of annual growth rates of real GDP.

c) Let’s define: Labor Share = Compensation of Employees / (Compensation of Employ- ees + Consumption of Fixed Capital + Net Operating Surplus - Proprietors’ Income).

Compute and plot the Labor Share.

Exercise 2:  GDP and inflation

Consider an economy that produces and consumes haircuts and cars.  The next table contains data on two different years

2015

2021

Price of a car	$50,000	$60,000
Price of a hair cut	$10	$20
Number of cars	100	120
Number of haircuts	500,000	400,000

a) Compute the following indicators for each year using 2015 as your base year: nominal GDP, real GDP and the GDP deflator.

b) How much did prices go up between 2015 and 2021?  What has been the annual inflation rate?

Exercise 3: Inflation and the substitution effect

Jane only eats apples. In year 1, red apples cost $1 and green apples $2; Jane buys 8 red apples and 3 green apples. In year 2, red apples cost $2 and green ones $1, and Jane buys 7 green apples and 3 red apples.

a) Compute the CPI of apples taking year 1 as your base year.

b) Compute Jane’s nominal expenditure in apples. How did that change between year 1 and 2?

c) Compute Jane’s real expenditure in apples using year 1 as your base year.  How did that change between year 1 and 2?

d) Compute the price deflator, defined as the ratio of nominal to real expenditure. How did that change between year 1 and 2?

Exercise 4:  National accounting and international comparisons

Binsula, Rinsula and Tinsula are three small islands. The only final goods produced are books (B), jeans (J) and wine (W), and suppose each island has its own currency (denote PB the peso of Binsula, PR the peso of Rinsula and PT the peso of Tinsula).  Next table contains the quantities and prices of the commodities produced in each island in 2014 (all measured in local currency).

B

J

W

Price B

Price J

Price W

1,000	20	200	5	25	0.5
80	300	5,000	10	60	2
300	300	3,000	1	4	0.1

a) Compute GDP of each island in local currency.

b) Suppose the exchange rate of each currency relative to the dollar is (PB/$)=0.8,

(PR/$)=2.88 and (PT/$)=0.15 and compute the value of GDP in each island, all expressed in dollars.

c) Compute the relative prices of books and jeans in terms of wine in each island.  d) Obtain a measure of GDP in each island expressed in units of wine.

Exercise 5:  Production and income distribution

Consider and economy with the following production technology: ,Y = 9K1/3L2/3  where

the aggregate capital stock is K=100, and aggregate labor is L=100. The price of output is 1.

a) Write down the maximization problem of the firm.

b) Compute the equilibrium wage and capital return.

c) Compute total payments to labor and capital. Show Euler’s Theorem holds, i.e. show that total payments to capital and labor equal the value of output.

d) What share of output goes to labor and capital?

e) Suppose there is an increase in L, what would be impact on wages and capital returns? Explain.

Multiple choice questions

1) The market value of all final goods and services produced within an economy in a given period of time is called:

a. industrial production.

b. gross domestic product.

c. the GDP deflator.

d. general durable purchases.

2) All of the following are measures of GDP except the total:

a. expenditures of all businesses in the economy.

b. income from all production in the economy.

c. expenditures on all final goods and services produced.

d. value of all final production.

3) An economy’s                   equals its                      

a. consumption; income

b. consumption; expenditure on goods and services

c. expenditure on goods; expenditures on services

d. total income; total expenditure on goods and services

4) GNP equals GDP             income earned domestically by foreigners              income that nationals earn abroad.

a. plus; plus

b. minus; minus

c. minus; plus

d. plus; minus

5) The amount of capital in an economy is a                   and the amount of investment is a                  .

a. flow; stock

b. intermediate good; final good

c. stock; flow

d. final good; intermediate good

6) When a firm sells a product out of inventory, investment expenditures                and consumption expenditures                 .

a. increase; decrease

b. decrease; increase

c. decrease; remain unchanged

d. remain unchanged; increase

7) Assume that a tire company sells 4 tires to an automobile company for $400, another

company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, how much GDP has been generated?

a. $20,000.

b. $20,000 less the automobile company’s profit on the car.

c. $20,900.

d. $20,900 less the profits of all three companies on the items that they sold.

8) Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002

and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real GDP (measured in 2002 prices) in 2009 was:

a. $5.

b. $6.50.

c. $9.50.

d. $11.

9) Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002

and $0.50 in 2009. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and 10 oranges were purchased in 2009, the CPI for 2009, using 2002 as the base year, is:

a. 0.75.

b. 0.80.

c. 1.

d. 1.25.

10) A real estate agent was renting her home.  She then married her landlord so that the two of them now jointly own the home and she no longer pays him rent---and because this woman is a real estate agent she handles all of the property transfer paperwork herself. Using the current definition for GDP, it would:

a. would decrease.

b. would increase.

c. would be unchanged.

d. first decrease and then increase.

11) A woman marries her butler.   Before they were married, she paid him /$60,000 per year.  He continues to wait on her as before (but as a husband rather than as a wage earner).   She earns /$1,000,000 per year both before and after her marriage.  Using the current definition for GDP, it would:

a. would decrease.

b. would increase.

c. would be unchanged.

d. first decrease and then increase.

12) An economy’s factors of production and its production function determine the econ- omy’s:

a. inflation rate.

b. budget surplus or deficit.

c. investment rate.

d. output of goods and services.

13) A competitive, profit-maximizing firm hires labor until the:

a. marginal product of labor equals the nominal wage.

b. marginal product of labor equals the real wage.

c. real wage equals the real rental price of capital.

d. nominal wage equals the rental price of capital.

14) The fraction of income that goes to labor is

a.

b. L

c. 

d. Y