Seminar 1 (answers)
1. Which of the following news stories (all published in early 2014) would typically be studied
in macroeconomics? (Select all that apply)
•
A. "5 Reasons Why Apple is Looking Like the Next Sony"
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B. "Which College—and Which Major—Will Make You Richest."
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C. "Expectations High for March Employment."
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D. "What If Economic Growth Is No Longer Possible?"
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E. "We Believe Inflation Should Rule Monetary Policy."
2. Why is it essential to differentiate between real and nominal growth rates of GDP?
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A. The nominal growth rate is more informative than the real growth rate since it is broader
in the sense that it captures both price and output changes.
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B. It is the real growth rate that is meaningful since it indicates the change in the production
of goods andservices, a very significant source of improved living standards.
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C. The nominal growth rate combines the effect of price changes along with changes in the
production of goods and services and thus gives a less clear indication of the impact on
living standards.
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D. All of the above.
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E. B and C only.
3. The accounting identity that is used to estimate the gross domestic product of a country is
given by
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A. Production equivalent≡ Expenditure equivalent≡ Income
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B. Consumption equivalent≡ Income minus Saving
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C. Income equivalent≡ Production minus Consumption
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D. Production equivalent≡ Expenditure equivalent ≡ Consumption
4. What important factors do GDP estimates leave out? (Check all that apply)
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A. Leisure.
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B. The value of intermediate goods.
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C. The production of illegal professions.
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D. Environmental costs.
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E. Home production.
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Solve the problem
Suppose two countries start with the same real GDP per capita, but country A is growing at
2% per year and country B is growing at 3% per year.
After 140 years, how much larger will be country B’s GDP per capita than country A’s?
Apply Rule of 70 to solve the problem.
Answer:
70
𝑅𝑢𝑙𝑒 𝑜𝑓 70 = 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 = 𝑌𝑒𝑎𝑟𝑠 𝑡𝑜 𝑑𝑜𝑢𝑏𝑙𝑒
Step 1:
𝑅𝑢𝑙𝑒 𝑜𝑓 70 =
140𝑦𝑒𝑎𝑟𝑠
35𝑦𝑒𝑎𝑟𝑠
70
𝐶𝑜𝑢𝑛𝑡𝑟𝑦−𝐴′ 𝑠 𝑅𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ
=
70
2
= 35
= 4 , which indicates that Country A’s real GDP doubles 4 times in 140 years.
In other words,
Country A’s final GDP = 24 Y (Initial GDP)
Step 2
70
𝑅𝑢𝑙𝑒 𝑜𝑓 70 = 𝐶𝑜𝑢𝑛𝑡𝑟𝑦−𝐴′ 𝑠 𝑅𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ =
140𝑦𝑒𝑎𝑟𝑠
23.3
70
3
= 23.3
≈ 6 , which indicates that Country B’s real GDP doubles 6 times in 140 years.
In other words,
Country B’s final GDP = 26 Y (Initial GDP)
Step 3:
Now, we can compare two countries real GDP, which were equal in the initial level.
24 𝑌𝑥 = 26 𝑌
26
𝑥 = 24 = 4
So, country B’s real GDP will be 4 time larger than country A’s GDP after 140 years.
2
Time to double
Assume that in a specific country GDP per capita, or per worker, grows at the rate g each year over
many years, where g is written as a percentage, e.g. 2 per cent. Show that GDP per capita, or
worker, will then approximately double every 70/g years. Use this to set up a table showing for each
of the 15 richest countries in the world in 1998, the country's average annual growth rate in GDP per
worker from 1960 to 1998 (you can take these from Table 2.2), and the number of years it takes for
the country's GDP per worker to double, if growth continues at the same rate as it averaged from
1960 to 1998.
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Answer:
𝑦
𝑡
Suppose constant growth rate of 1 + 𝑔 = 𝑦 −1
→ 𝑦𝑡 = (1 + 𝑔)𝑡 𝑦0
𝑡
How long does it take for GDP to double?
2𝑦 = (1 + 𝑔)𝑡 𝑦 → =
70
𝑙𝑛2
70
≈
ln(1 + 𝑔) 𝑔 ∗ 100%
𝐿𝑢𝑥𝑒𝑚𝑏𝑜𝑢𝑟𝑔 = 3.2 ≈ 22 𝑦𝑒𝑎𝑟𝑠
With the given average growth rate of 3.2 Luxembourg can double its GDP in 22 years.
𝑈𝑆𝐴 =
70
1.8
≈ 39 𝑦𝑒𝑎𝑟𝑠
With the given average growth rate of 1.8 USA can double its GDP in 39 years.
Etc.
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