Macroeconomics
PROBLEM SET 1
True/False
1. Inflation is bad for the economy because goods and services are more expensive.
2. The rate of inflation computed using the CPI is a better index of inflation than the rate
of inflation computed using the GDP deflator.
3. The Phillips curve on average is upward sloping.
Problems
1- Consider an economy with three companies A, B, C. Company A produces cardboard,
which is used by Company B to produce boards and cards, which is used by Company
C to produce board games. Company A’s revenues (from sales to Company B)
amount to €100, and its expenses on labor amount to €30. Company B’s revenues
amount to €250, while its expenses on labor amount to €80. Company C’s revenues
amount to €400, while its expenses on labor amount to €90. Compute this economy’s
GDP using the three versions that we saw in class.
2- Suppose that the country of Macronia has three industries: bananas, tires, and cars.
(Macronia is a closed economy, both with respect to capital and goods flows.)
Macronia's population is 10,000. Bananas are produced by independent farmers, and
the country produces 17 million bananas in a year, all of which are consumed by
Macronia's banana-loving households. Tires are made by independent entrepreneurs
from worthless junk. The total value of tires produced in a year is €38 million. These
tires are in turn purchased entirely by Macronia's car assembly plant. The car
assembly plant turns out 62 cars a year, hiring workers and paying a total of €10
million per year in wages. The market price of a car is €3 million and the market price
of a banana is €2.
a) Calculate Macronia's GDP using the final sales definition of GDP.
b) What is Macronia's GDP per capita?
c) Compute value-added in each industry, and in the economy as a whole. Is that the
same with what you find in part a)?
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3- For each of the following transactions, determine the contribution to the current year’s
GDP of France using the product and income approach that we saw in class.
a) On January 1, 2023, you purchase 10 liters of gasoline at a BP station at €1.60 per
liter. The gas station purchased the gasoline the previous week at a wholesale
price (transportation included) of €1.30 per liter.
b) An Arab Sheikh purchases a French chateau for €10,000,000. The broker’s fee is
6%.
c) Recovering from his illness, Jean-Pierre Perrin enters the work force, taking a job
that will pay €40,000 over the year. Suppose that Mr. Perrin needs to look after
two kids and after entering the work force must pay €16,000 over the year for
professional childcare services.
d) A Japanese company builds a nuclear power station in Cergy for 10 billion euros,
using only local labor and materials.
e) You are informed that you have won €3,000,000 from Loto, to be paid to you, in
total, immediately. What happens if TF1 pays you an additional €5000 fee to
appear in a TV commercial publicizing the lottery.
4- Count at least three factors explaining why GDP can be an inadequate measure to
assess the prosperity (or development) of a country. Can you think of any criticism
about GDP’s ability to measure economic activity (Hint: consider for instance,
agricultural countries in which many people grow their own food)?
5- Consider an economy that produces only three types of fruit: apples, oranges, and
bananas. In the base year (a few years ago), the production and price data were as
follows:
Fruit
Quantity
Price
Apples
3000 bags
€2 per bag
Bananas
6000 bunches
€3 per bunch
Oranges
8000 bags
€4 per bag
In the current year the production and price data are as follows:
Fruit
Quantity
Price
Apples
4000 bags
€3 per bag
Bananas
14000 bunches
€2 per bunch
Oranges
32000 bags
€5 per bag
a) Find nominal GDP in the current year and in the base year. What is the percentage
increase since the base year?
b) Find real GDP in the current year and in the base year. By what percentage does
real GDP increase from the base year to the current year?
c) Find GDP deflator for the current year and the base year. By what percentage does
the price level change from the base year to the current year?
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d) Would you say that the percentage increase in nominal GDP in this economy since
the base year is due more to increases in prices or increases in the physical volume
of output?
6- Consider the following data on nominal GDP and prices.
1996
1997
1998
1999
2000
2001
Nominal GDP
260
279
299
342
379
388
Price Level
100
103
107
115
122
125
a) Calculate the inflation rate between each of the consecutive years in the above
table.
b) Calculate the real GDP in each year in terms of 1996 dollars.
c) Calculate the growth rate in nominal GDP between each of the consecutive years.
Calculate the growth rate in real GDP between each of the consecutive years.
Which growth rate is generally higher? Why? Which growth rate is the more
informative measure of economic performance?
7- The following labor market data are available for a certain economy (all figures in the
last four columns are in millions of persons):
Year
Adult
Discouraged Labor
Population Workers
Force
2007
41
1.54
27
2008
41.7
2.38
25.5
Employment
25.11
23.97
a) Calculate the unemployment rate for the years 2007 and 2008.
b) Does the unemployment rate move in the same direction or in the opposite
direction with employment from year 2007 to year 2008? Is this something that
you would expect? Why or why not?
c) Why do you think the unemployment rate changes the way it does from year 2007
to 2008?
d) Some economists hold the view that discouraged workers should be taken into
account in the measurement of the unemployment rate. Suggest a new definition
of (or a new formula for) the unemployment rate and calculate it for years 2007
and 2008 such that the discouraged workers are counted as unemployed.
e) How does the unemployment rate change now as the employment decreases from
year 2007 to year 2008?
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8- Can the unemployment rate and employment ratio rise during the same month? Can
the participation rate fall at the same time that the employment ratio rises? Explain.
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