Economics 248 Assignment 1 (version A)
92.5%
This assignment has a maximum total of 100 marks and is worth 10 percent of your total grade
for this course. You should complete it after completing your coursework for units 1, 2, and 3.
Answer each question clearly and concisely.
1. 10/10Use the data below to answer the questions that follow.
(10 marks)
Item
Amount
(in billions of dollars)
Consumption expenditure
300
Government expenditure
99
Interest and investment income
31
Profit of corporations and government
enterprises
54
Income from farms and unincorporated
businesses
40
Gross investment
146
Exports
36
Imports
56
Wages, salaries, and supplementary labour
income
275
Capital consumption allowance
(depreciation)
50
Indirect taxes, less subsidies
75
a. Calculate net exports.
Nx = N - X = 36 - 50 = -20
(1 mark)
b. Use the expenditure approach to calculate GDP.
C + I + G + (N - M)
300 + 146 + 99 + (36 - 56) =
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300 + 146 + 99 + (- 20) = 525
(2.5 marks)
c. Use the income approach to calculate GDP.
Wages, salaries, and supplementary labour income + Income from farms and
unincorporated businesses + Profit of corporations and government enterprises + Interest and
investment income + depreciation + indirect taxes, less subsides
275 + 40 + 54 + 31 + 50 + 75 = 525
(2.5 marks)
d. Calculate net domestic product (at factor cost).
Wages, salaries, and supplementary labour income + Income from farms and
unincorporated businesses + Profit of corporations and government enterprises + Interest and
investment income
275 + 40 + 54 + 31 = 400
(2 marks)
e. Calculate net domestic income (at market price).
Net domestic product (at factor cost) + indirect taxes, less subsides
400 + 75 = 475
(2 marks)
2. Consider the circular flow model for Doneville economy. In 2015, flow A was $53.0
billion, flow B was $31.0 billion, flow C was $13.0 billion, and flow E was $3.0 billion.
(10 marks)
10/10
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Assignment 1A
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Calculate the following (show and explain your work):
a. GDP
In 2015, flow A was $53.0 billion, flow B was $31.0 billion, flow C was $13.0 billion,
and flow E was $3.0 billion.
Y = C + I + G + (N - M) is the equation to calculate GDP.
In the circular flow diagram flow A is Y, aggregate income (income paid to households by
firms); flow B is C, consumption (household’s consumption spending); flow C is G, government
expenditure on goods and services; flow E is Nx, Net exports (firms sell and receive goods from
the rest of the world).
We have all the information above to calculate GDP through the aggregate expenditure approach
using the equation above, if we first solve for I, to get the value of investment that year.
However, we already know that GDP is $53.0 billion. This is because aggregate income equals
aggregate expenditure, which equals GDP. We already know the aggregate income in 2015 is
$53.0 billion. Therefore GDP is $53.0 billion.
(5 marks)
b. Investment expenditure
Y = C + I + G + NX is our equation to calculate GDP; we rearrange the equation to solve for I.
I = Y - C - G - NX
I = 53 - 31 - 13 - 3 = 6; Investment expenditure was 6 billion in 2015.
We can calculate GDP using the expenditure approach now: GDP = C + I + G + NX = 31 + 6 +
13 + 3 = and we get 53 billion. Same as the given aggregate income.
(5 marks)
3. In January 2015, the Zanzi economy had an unemployment rate of 5.9 percent. In August
2016, the unemployment rate was 8.7 percent.
(10 marks)
10/10
a. Predict what happened to unemployment between January 2015 and August 2016, if
the labour force was constant.
The unemployment rate is calculated by the number of people unemployed divided by the
labour force, and multiplied by 100. Between 2015 and 2016, the unemployment rate in Zanzi
increased, from 5.9 percent to 8.7 percent. If the labour force remained constant during this time,
then it must be the case that the number of people unemployed increased.
(2.5 marks)
b. In part a, what happened to employment? Explain.
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The labour force consists of both unemployed and employed people. If the labour force
remained constant in part a, and the number of people unemployed increased, then it must be the
case that there was a decrease in employment. The people in the “employed” category of the
labour force moved into the “unemployed” category of the labour force. The labour force as a
whole remained unchanged (no one entered or left the labour force).
(2.5 marks)
c. Predict what happened to the labour force between January 2015 and August 2016, if
unemployment was constant.
The unemployment rate is calculated by the number of people unemployed divided by the
labour force, and multiplied by 100. Between 2015 and 2016, the unemployment rate in Zanzi
increased, from 5.9 percent to 8.7 percent. If unemployment was constant, then it must be the
case that the labour force decreased.
(2.5 marks)
d. In part c, what happened to labour force participation rate? Explain.
The labour force participation rate is calculated as the labour force divided by the
working-age population, multiplied by 100. As in part c, if unemployment was constant, and the
labour force decreased, the labour force participation rate would also decrease. There are less
people in the labour force, and if we divide that by the working age population (held constant),
the labour force participation rate, by percent, would decrease accordingly.
(2.5 marks)
4. The people on Rabuti Island buy only fish and cloth. The CPI basket contains the
quantities bought in 2014. The average household spent $120 on fish and $60 on cloth in
2014, when the price of fish was $2 per kilogram, and the price of cloth was $5 per
metre. In 2015, fish was $4 per kilogram, and cloth was $6 per metre.
(10 marks)
10/10
a. Calculate the CPI basket and the percentage of the household’s budget spent on fish
in 2014.
In 2014, the average household spent $120 on fish and $60 on cloth.
The price of fish in 2014, the reference base year, was $2 per kilogram. As such, it must
be the case that the CPI basket contains ($120 / $2) 60 kilograms of fish.
The price of cloth in 2014, the reference base year, was $5 per metre. So, it must be the
case that the CPI basket also contains ($60 / $5) 12 metres of cloth.
Furthermore, in 2014 the average household spent $120 on fish and $60 on cloth, with
the total budget of 180. The percentage of the household budget spent on fish is (120 / 180) x
100 = 66.7% in 2014.
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(4 marks)
b. Calculate the CPI in 2015.
To find the CPI in 2015, we have to first calculate the cost of the CPI basket in 2014 and
2015. The formula to get the CPI in 2015 is:
CPI = (Cost of CPI basket in current year prices / Cost of CPI basket in base year prices)
x 100.
The cost of the CPI basket in 2014 was (120 + 60) = $180 and the cost of the CPI basket
in 2015, with the new prices used at the same quantities, was (240 + 72) = $312.
CPI in 2015 = (312 / 180) x 100 = is 173.3
(3 marks)
c. Calculate the inflation rate in 2015.
The inflation rate in 2015 = [(CPI in 2015 - CPI in 2014) / (CPI in 2014)] x 100
= [(173.3 - 100) / (100)] x 100
= is 73.3 percent.
(3 marks)
5. Canadian GDP growth was 1.1 percent in 2015 and is expected to edge down slightly in
2016 due to the persistent low price of oil, which hurts investment in the oil sector. The
loonie is expected to remain weak vis-à-vis the US dollar, but the growth of US GDP is
expected to slow down in 2016 due to a weak energy sector, a strong dollar, and turmoil
overseas.
(10 marks)
a. Use the expenditure approach for calculating Canada’s GDP to explain how a weaker
loonie might affect the growth of the Canadian economy. Also, how is a slow-down
in US economic growth expected to affect the GDP growth of Canada?
2.5/5
The expenditure approach for calculating GDP follows as, GDP = C + I + G + (X-M). A
weaker loonie would affect household consumption, investment, government spending and
potentially also imports and exports. This would have a positivenegative affect for on the growth
of the Canadian economy overall. Household consumption would be impacted as the price of
foreign goods and services would rise for consumers, due to higher input costs for businesses.
Export growth is also a key part of GDP, and a weaker loonie would impact this.how? weaker
loonie – more exports – higher Cdn GDP growth Investments would be impacted, particularly
international investments, which a weaker currency would effect. Further, the Canadian
government will have to pay more when manning its debts with the U.S. and other countries.
Moreover, any good that is stabilized with the U.S. dollar would become more expensive for
Canada and its citizens. A slow-down in US economic growth would affect the GDP growth of
Canada in significant ways as the U.S. is Canada’s largest trading partner, and many goods (like
gasoline) are pegged to the U.S. dollar for Canadians. A slow-down of the U.S. economy would
spill over to Canada, and would be felt in all the sectors mentioned above that make up Canada’s
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overall GDP. Imports may be less expensive if the U.S. has an economic downturn, but overall, a
slow-down of the U.S. economy and GDP growth rate would inevitably lead to a slow-down of
Canada’s GDP growth rate through consumption, investment, government spending as well as
exports and imports coming in and out of the U.S.yes
(5 marks)
b. Why might Canada’s recent GDP growth rates overstate the actual increase in the
level of production taking place in Canada?
1/ 2.5
The GDP is the market value of the final goods and services produced in a given
economy in a specific time frame. GDP growth rate measures the GDP of a previous quarter
against the GDP in the current quarter, and is seen as a marker of economic growth. However,
Canada’s GDP growth rates might overstate the actual increase in the level of production
because the measureswouldn’t this be understating GDP growth as production is included in
GDP only when it is sold [C + I + G + (X-M)] may not take into account parts of the economy
that are not running so smoothly or areas that are not in equilibrium. For example, Canada may
produce a large amount of a good to export to another country, but may not be able to sell that
good abroad at a sufficient quantity, and would have a surplus in that market. So while it may
look like Canada has produced a good, it is not able to benefit from it due to disequilibrium in
the market. Issues due to inefficiencies within the components that make up GDP may result in
overstating the actual level of production.
GDP omits the value of home production
(2.5 marks)
c. Explain the complications involved with attempting to compare the economic welfare
in Canada and the United States by using the GDP for each country.
2.5/2.5
Using GDP as a measure of economic welfare when comparing nations can be
problematic for a couple of reasons. First, the individual GDPs of nations are measured in their
own currencies and dollar values. Canada uses its own Canadian dollar when valuing its GDP,
and the U.S. uses the American dollar when calculating its GDP. In order to get an accurate
comparison, we must first convert the GDPs we are comparing into a common currency.
Additionally, Purchasing Power Parity (PPP) would have to be taken into account when looking
at GDP as a way to indicate economic welfare in both countries. The goods and services in both
countries would have to be valued at equivalent prices. What one is able to purchase (and benefit
from) with their given income in Canada may not be equivalent to what a person can purchase in
the U.S. The GDPs of both countries cannot be taken at face value when examining economic
welfare. There would have to be further evaluation involved to obtain an accurate picture when
comparing the two countries.
(2.5 marks)
6. Suppose a country reported the following data for July 2015:
10/10
Labour force: 19,438,500
Employment: 18,002,700
Working-age population: 28,695,400
(10 marks)
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Assignment 1A
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Calculate the following:
a. Unemployment rate
The unemployment rate is calculated by the number of people unemployed divided by the
labour force, and multiplied by 100; Labour force minus employment gives us the number of
people unemployed: 19,438,500 - 18,002,700 = 1,435,800. (1,435,800 / 19,438,500) x 100 =
7.4% is the unemployment rate.
(2.5 marks)
b. Labour force participation rate
The labour force participation rate is calculated as the labour force divided by the
working-age population, multiplied by 100: (19,438,500 / 28,695,400) x 100 = 67.7% is the
Labour force participation rate.
(2.5 marks)
c. Employment-to-population ratio
The employment-to-population ratio is calculated as the number of people employed
divided by the working-age population, multiplied by 100: (18,002,700 / 28,695,400) x 100 =
62.7 % is the employment-to-population ratio.
(2.5 marks)
d. If the unemployment rate was 6.2 percent in July 2014, did the unemployment
decrease or increase in 2015? Explain any two factors that could be responsible
for this change in unemployment.
If the unemployment rate was 6.2 percent in July 2014, and then was 7.4 percent in July
2015 (see part a), the unemployment increased in 2015. Two factors that could be responsible for
this change include 1) reasons of frictional unemployment. For example, there may be a number
of recent graduated students searching for work, and are temporarily unemployed. 2) reasons of
structural unemployment. For example, technological advances have caused unemployment in a
popular industry.
(2.5 marks)
7. If the nominal GDP is $324 billion in the base year, and it falls to $320 billion in year 1
and rises to $345 billion in year 2, calculate the real GDP in each year, given that the
price index has fallen from 100 in the base year to 96.5 in year 1 and risen to 108.3 in
year 2. If the price index 5 years before the base year was 72.2, and the nominal GDP for
5 years before the base year was $215.0 billion, calculate the real GDP for that year.
Show your work in all cases.
10/10
Base Year: Nominal GDP = 324 billion; Price Index = 100
- Real GDP Base Year = (Nominal GDP/ Price Index) x 100
= (324/ 100) x 100 = 324 billion
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- Real GDP in the Base Year is the same as Nominal GDP in the Base year.
Year 1: Nominal GDP = 320 billion; Price Index = 96.5
- Real GDP in Year 1 = (Nominal GDP/ Price Index) x 100
= (320/ 96.5) x 100 = 331.6 billion
Year 2: Nominal GDP = 345 billion; Price Index = 108.3
- Real GDP in Year 2 = (Nominal GDP/ Price Index) x 100
= (345/ 108.3) x 100 = 318.6 billion
Nominal GDP 5 years before Base Year = 215 billion
Price Index 5 years before Base Year = 72.2
Real GDP 5 years before = (Nominal GDP/ Price Index) x 100
= (215/ 72.2) x 100 = 297.9 billion
(10 marks)
8. 10/10Classify the following items and scenarios as consumption or investment goods.
Justify your answers.
(10 marks)
a. The Mackenzie pipeline
This is a clear example of an investment good. The pipeline is intended to create more
value and wealth than the original monetary amount that was put into building it. Building a
pipeline is creating infrastructure that can transport a valuable commodity, oil, and continue to
create greater wealth. It also helps society by creating more jobs (and wealth) in the energy
sector.
(2 marks)
b. A loaf of bread
This is arguably a consumption good, because the purchase of a loaf of bread generally
ends there. The money is transferred from the consumer to the bakery from which the bread is
bought, the bread is eaten by the consumer, and that is the end of that. This could be an
investment good if the loaf was not bought for final consumption (ie. made into a sandwich by a
cafe, to sell), but if it was bought for final consumption it is a consumption good.
(2 marks)
c. A pair of scissors bought by a hairdresser from the Ace Beauty Supply Company
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This is an investment good. The pair of scissors will be used as a tool by the hairdresser
to generate a return on the investment. By paying for the scissors once, and then using them
repeatedly to give haircuts, the hairdresser continues to earn a profit on the initial purchase of
scissors.
(2 marks)
d. A tennis racquet
This is a consumption good. The tennis racquet, purchased by an ordinary person, is not
meant to generate further revenue on the initial deposit of money. It is a purchase for
entertainment and to start a new hobby. The money goes from the consumer to the tennis racquet
making company and ends there. No further returns expected, ordinarily (unless the tennis player
is Serena Williams, who is going to win the Wimbledon in an exception case).
(2 marks)
e. The money spent to stay at the Hilton Hotel by a Canadian couple visiting Hawaii
This is arguably a consumption good. Spending money on a hotel during a vacation
transfers the consumer’s money from the consumer to the hotel. There is no return on the
monetary value spent. One can argue that a vacation is an investment, because a relaxing
vacation can make a person more productive at work post-vacation and throughout the year.
However, there is a strong argument that this is a consumption good, because there is no tangible
expected return on the money spent.
(2 marks)
9. According to UNESCO’s 2011 report, two-thirds of African children are locked out of
secondary school. If governments were to provide good schools and encourage children
to take advantage of them, answer the following questions.
(10 marks)
a. Describe any two ways in which greater education opportunities could lead to faster
economic growth.
2.5/2.5
Economic growth is affected by labour productivity. Labour productivity in the modern
age comes three sources: physical capital growth, human capital growth and technological
advances. The first way that greater education opportunities could lead to faster economic
growth is by enhancing human capital. Children can become educated and become skilled human
capital. This would lead to economic growth, higher incomes and a higher standard of living.
Second, greater education opportunities would lead to greater technological advances, as
educated individuals in that society would have the ability to create greater and newer
technological outputs. They would also be skilled in how to use such technology, and technology
increases productivity. Productivity increases standard of living and economic growth.
(2.5 marks)
b. 2.5/2.5 Explain what will happen to potential GDP.
Growth of the supply of labour and growth of labour productivity cause potential GDP to
grow. Through education, both the supply of labour (more people equipped to work) and labour
productivity (more highly skilled workers) will grow, and as a result, potential GDP will
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increase. As there is an increase in technology, human capital and an increase in the workforce,
the aggregate production function will shift upwards and potential GDP will be greater.
(2.5 marks)
c. Explain what will happen to employment.
1/ 2.5
Employment will increase due to higher demand for labouras human capital and
technological advances continue to increase. People will have the skills necessary to provide
value in jobs, and the skills as well as resources to create businesses. The supply and demand of
labour in the labour market is determined by the real wage rate. The real wage rate would
increase in a society with educated individuals and all the factors of labour productivity present.
Thus, employment would increase overtime in the labour market, as quantity of labour and the
real wage rate would increase and reach equilibrium.
(2.5 marks)
d. Explain what will happen to real wage rate.
2.5/2.5
The real wage rate adjusts so that the labour market is in equilibrium. There are surpluses
and shortages in the labour market, just as in any other market. The real wage rate in this
situation would increase until it reaches equilibrium. As the society becomes more productive,
and the supply and demand of the quantity of labour increases (both curves shift to the right), the
real wage rate will increase due to higher demand for labouraccordingly.
(2.5 marks)
10. The following table presents the data for an economy when the government’s budget is
balanced.
(10 marks)
Real interest rate
Loanable funds demanded
Loanable funds supplied
(percent per year)
(billions of 2007 dollars)
(billions of 2007 dollars)
Savings
Investments
1
2
3
4
5
6
7
8
9
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
a. What is a balanced budget, and why does it matter?
2/2
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A balanced government budget is when government revenues are equal to the
government’s expenditures. In the case of a balanced budget, a budget deficit or surplus are not
present, as the budget is balanced and income equals expenditure. It matters because the
government’s budget has an impact on the economy overall in terms of investments, interest
rates and private savings. The government budget could likely influence each of these in
significant ways. For example, some argue that a balanced budget lowers interest rates and
increases investment. In economics, we know that government surpluses and deficits decrease
and increase interest rates, respectively, and influence private activity in the loanable funds
market.
(2 marks)
b. Calculate the equilibrium real interest rate, investment, and private saving. Why is
this interest rate referred to as equilibrium?
2/2
The equilibrium real interest rate is 4%, as the loanable funds demanded and the loanable
funds supplied are equal at that interest rate, both at 6.0. The level of investment and private
saving is 6.0 billion at the equilibrium real interest rate, and they both equal each other.
(2 marks)
c. If planned saving increases by $2 billion at each real interest rate, explain the change
in the real interest rate and investment.
1/ 2
If planned saving increased by 2 billion at each real interest rate, the equilibrium real
interest rate would decreaseyes from 4% to 2% and the equilibrium investment would
increasedecrease from 6.0 billion to 4.0 billion.
(2 marks)
d. If planned investment increases by $1 billion at each real interest rate, explain the
change in saving and the real interest rate.
1/ 2
If planned investment increased by $1 billion, the equilibrium real interest rate would
increaseyes from 4% to 5% and the equilibrium planned saving would increasedecrease from 6.0
billion to 5.0 billion.
(2 marks)
e. If both planned savings and planned investment increase by $1 billion at each real
interest rate, explain the change in the real interest rate and equilibrium quantity of
loanable funds. Sketch your answer using the diagram of the model for loanable funds
market.
2/2
If both planned savings and planned investment increase by $1 billion, the real interest
rate would remain the same, at the 4% rate. The equilibrium quantity of loanable funds would
change, and would increase to 7.0 billion. The graph below shows the shift rightward in the
supply and demand curves in red, the constant 4% real interest rate, and the change in quantity
from 6 to 7 billion.
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Assignment 1A
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(2 marks)
Real interest
rate
S2
4%
D2
6%
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7%
Assignment 1A
Quantity of
Loanable Funds
January 25, 2019