ECON2003 The 1 st Assignment of Principle of Macroeconomics 2022-23

Question 1 (20 marks total)

For each of the event mentioned below, determine which component(s) of China’s GDP of the current year is affected and by how much, and the change in China’s current GDP as a result.

(a) Mr. Zhang bought two Gree air conditioners, at 3,500 yuan each, one for his newly decorated home, and one for the small restaurant he owns in UIC. (3 marks)

(b) Mrs. Wang, the owner of a printing shop near UIC, just spent 5,000 yuan on an imported photocopying machine for her shop. (3 marks)

(c) Mr. Lee, a Hong Kong resident who runs a shoe factory in Zhuhai, finished production of shoes of market value $60,000. Half of these shoes are sold and shipped out to foreign customers by year end; the other half are in ending inventory. (3 marks)

(d) Mr. Zhao has been driving his Cadillac for years, and decided recently to change for a new car. He spent 3,500 yuan to repair the Cadillac, and then sold it to a second-hand car dealer for 150,000 yuan. On the following day, he bought a Tesla, which was made in Tesla’s Shanghai factory last year, for the price of 400,000 yuan. (5 marks)

(e) A Hollywood Movie earned $225 million theatre revenue in China. The Chinese distributor paid $150 million royalty on the movie to the Hollywood producer. (3 marks)

(f) The Gree Company, an air conditioner manufacturer headquartered in Zhuhai, spent 230 million rmb on the construction of a new factory in South America. (3 marks)

Question 2 (20 marks total)

The CPI basket for one small economy consists of 12 units of pork, 30 units of rice, and 18 units of Cotton. The price information for three years as given below:

a) Using 2011 as the base year, calculate the consumer price index (CPI) for the three years, and the rate of inflation from last year (i.e. from 2012 to 2013). (7 marks)

b) Just by looking at the price data given, can you identify one problem with the CPI you calculated as a measure of cost of living? Does this problem cause the CPI to overstate or understate the cost of living? (4 marks)

c) You also learned that the pig farms use more of special kind of feed, which makes the pig grow faster than before. As a result, the pork is less delicious and nutritious as before. Does this problem cause the CPI to be overstated or understated? Explain. (4 marks)

d) For a person in this economy, if his salary increased from $6,000 in 2011 to $7,800 in 2013, is he better off or worse off in 2013 than he was in 2011? (5 marks)

Question 3 (5 marks each, 20 marks total)

a) Suppose the economies of Country A and Country B are the same in every aspect, except that Country B has more people. Assume that the population in both countries will remain constant over time. Which country has higher real GDP? Which country has higher real GDP per worker? Explain your answer with the aid of the production function.

b) We learned two conditions about the production function, Y= A F(L, K, H, N), one is the “constant return to scale”, and the other is the “diminishing return to capital”. Are these two conditions about the same production function contradictory to each other? Explain.

c) Country P is a developing country, and Country R is developed country. Currently the per capital real GDP are $25,000 in Country P and $50,000 in Country R; but the real GDP had been growing at 15% per year in Country P, and only at 2% per year in Country R. Some people predict that the high growth rate in Country P will enable it to become a richer country than Country R in 6 years. Their prediction is based on the calculation

25, 000´(1+15%)6 > 50, 000´(1+ 2%)6 . Do you agree with this prediction? Give your

reasons for agreeing or disagreeing with it.

d) We learned in the lecture that one policy to achieve economic growth is to encourage saving and investment. But is it true that the more people save and invest in an economy, the better it is for them? Briefly explain.