Economics 248 Assignment 1 (version A)
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. Use the data below to answer the questions that follow.
(10 marks)
Item
Consumption expenditure
Government expenditure
Interest and investment income
Profit of corporations and government
enterprises
Income from farms and unincorporated
businesses
Gross investment
Exports
Imports
Wages, salaries, and supplementary labour
income
Capital consumption allowance
(depreciation)
Indirect taxes, less subsidies
Amount
(in billions of dollars)
300
99
31
54
40
146
36
56
275
50
75
a. Calculate net exports.
(1 mark)
36-56 = $-20Bn
b. Use the expenditure approach to calculate GDP.
(2.5 marks)
GDP = C + I + G + NX
= 300 + 146 + 99 – 20 = $525Bn
c. Use the income approach to calculate GDP.
(2.5 marks)
31 + 54 + 40 + 275 + 50 + 75 = $525Bn
d. Calculate net domestic product (at factor cost).
(2 marks)
GDP – taxes = 525 – 75 = $450Bn
e. Calculate net domestic income (at market price).
(2 marks)
GDP - depreciation = 525 – 50 = $475Bn
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Assignment 1A
January 25, 2019
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)
Calculate the following (show and explain your work):
a. GDP
(5 marks)
A = GDP
B = Consumption
C = Govt Spending
D = Investment
E = Net exports
GDP = $53Bn
b. Investment expenditure
(5 marks)
Y=C+I+G+X
I=Y–C–G–X
I = 53 – 31- 13- 3= $6Bn
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)
a. Predict what happened to unemployment between January 2015 and August 2016, if
the labour force was constant.
(2.5 marks)
ECON 248v9
Assignment 1A
January 25, 2019
Unemployment rate is people unemployed divided by labor force. So if labor force
was constant, then the number of people unemployed increased.
b. In part a, what happened to employment? Explain.
(2.5 marks)
As unemployment increased with labor force staying the same, this means the
employment or the number of employed laborers decreased.
c. Predict what happened to the labour force between January 2015 and August 2016, if
unemployment was constant.
(2.5 marks)
If the unemployment rate increased with the unemployment constant, this means the
labor force had to decrease.
d. In part c, what happened to labour force participation rate? Explain.
(2.5 marks)
The labor force partipication rate decreased as the formula for unemployment rate is
unemployment/labor force and for it to increase from 5.9 to 8.7 with unemployment
remaining constant, the number of people working and looking for work must have
decreased.
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)
a. Calculate the CPI basket and the percentage of the household’s budget spent on fish
in 2014.
(4 marks)
CPI basket = 60kg fish and 12m cloth for a total of $180.
% of budget on fish = 120/180 = 66.67%
b. Calculate the CPI in 2015.
4*60 + 6*12 = $312
CPI = 312/180 *100 = 173.3
(3 marks)
c. Calculate the inflation rate in 2015.
(3 marks)
173-100 = 73.3%
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Assignment 1A
January 25, 2019
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?
Weaker loonie means there will be more Canadian exports and therefore, NX will
increase so GDP will increase.
However, this will be a reduction in the US GDP as US goods will more expensive
relative to the weaker loonie. Given that the US is Canadas biggest trading partner, a
slowdown in US economic growth will mean a slowdown of Canadas GDP growth as
well.
(5 marks)
b. Why might Canada’s recent GDP growth rates overstate the actual increase in the
level of production taking place in Canada?
As GDP grows over time, the actual production isn’t increasing at the same rate as the
other factors that influence GDP growth. Therefore the level of production may not
increase at all but Canada’s GDP will still increase from other expenditure.
(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.
The main issue is that goods and services in the two countries are not priced the same.
Overall GDP may give the purchasing power but because the goods and services are
not the same price, it will be impossible to compare economic welfare on the same
term based on GDP alone.
(2.5 marks)
6. Suppose a country reported the following data for July 2015:
Labour force: 19,438,500
Employment: 18,002,700
Working-age population: 28,695,400
(10 marks)
Calculate the following:
a. Unemployment rate
(19438500 – 18002700) / 19438500 = 7.38%
(2.5 marks)
b. Labour force participation rate
ECON 248v9
Assignment 1A
January 25, 2019
19438500/28695400 = 67.74%
(2.5 marks)
c. Employment-to-population ratio
18002700/28695400 = 62.74%
(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.
Unemployment increased from 6.2% to 7.38%.
This could be due to people leaving jobs or the destruction of jobs due to technological
advances.
(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.
Real GDP = Nominal GDP/Price Index * 100
Base year: 324/100 * 100 = $324Bn
Year 1: 320/96.5 * 100 = $331.6Bn
Year 2: 345/108.3 * 100 = $318.6Bn
5 Years before Base: 215/72.2 * 100 = $297.8Bn
(10 marks)
8. Classify the following items and scenarios as consumption or investment goods. Justify
your answers.
(10 marks)
a. The Mackenzie pipeline
Investment to create more jobs and energy supply
(2 marks)
b. A loaf of bread
Consumption good for consumption by consumer
(2 marks)
c. A pair of scissors bought by a hairdresser from the Ace Beauty Supply Company
Investment as it is a tool used by the business to generate income.
(2 marks)
d. A tennis racquet
Consumption as it is bought for a hobby. No money is made from it.
(2 marks)
e. The money spent to stay at the Hilton Hotel by a Canadian couple visiting Hawaii
Consumption as it is for a leisure vacation not a business activity.
(2 marks)
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Assignment 1A
January 25, 2019
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.
Greater education opportunities will lead to an increase in human capital, a more
educated labor force means it is more efficient and therefore there will be an increase in
economic growth from the increase in labor productivity.
Greater education will also result in technological advances which will also increase the
efficiency of the work force and increase economic growth.
(2.5 marks)
b. Explain what will happen to potential GDP.
Potential GDP is the real GDP at full employment. With a more efficient work force from
the education opportunities, the Potential GDP will increase.
(2.5 marks)
c. Explain what will happen to employment.
More education will result in more skilled labourers, who will have more job
opportunities available to them due to the increase in the skill of the labor force, and
therefore, employment will increase.
(2.5 marks)
d. Explain what will happen to real wage rate.
The real wage rate will increase as the productivity of labor increases.
(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)
1
9.0
3.0
2
8.0
4.0
3
7.0
5.0
4
6.0
6.0
5
5.0
7.0
6
4.0
8.0
7
3.0
9.0
8
2.0
10.0
9
1.0
11.0
a. What is a balanced budget, and why does it matter?
A balanced budged is when the revenues equal its outlays.
This matters because when there is a deficit in the government budget, the demand for
loanable funds increases, which will increase the real interest rate.
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Assignment 1A
January 25, 2019
In the case of a surplus, the supply of loanable funds will increase which will decrease
the real interest rate.
(2 marks)
b. Calculate the equilibrium real interest rate, investment, and private saving. Why is
this interest rate referred to as equilibrium?
Equilibrium interest rate is when the demand and supply of loanable funds is equal. This
occurs at a real interest rate of 4% where the demand and supply of loanable funds is at
$6Bn.
(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.
The planned saving refers to the supply of loanable funds. This will shift the
equilibrium so it occurs at a real interest rate of 3% where the demand and supply of
loanable funds is at $7Bn.
(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.
The planned investment refers to the demand of loanable funds. This will shift the
equilibrium so that it occurs at a real interest rate between 4% and 5%. Assuming a
linear change, this will put the real interest rate at 4.5% where the demand and supply
of loanable funds will be $6.5Bn.
(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.
If the demand and supply both increase by the same amount, the equilibrium real
interest rate will be back to 4%. However, the demand and supply will be $7Bn
instead of $6Bn.
(2 marks)
ECON 248v9
Assignment 1A
January 25, 2019