Homework 1
Economics 503
Foundations of Economic Analysis
Assigned: Week 1
Due: Week 2
1.
You are analyzing the profitability of Hong Kong’s movie industry. You hear that
Steven Chao’s Kung Fu Hustle is the top grossing Hong Kong film of all time.
You are given a list of local gross box office receipts for a number of Hong Kong
movies.
N_t in 2004 Prices
HK$64,631,007.9
HK$63,993,333.3
HK$63,082,866.1
HK$62,851,511.6
HK$62,109,785.7
HK$61,473,432.2
HK$60,830,000.0
HK$57,580,734.7
HK$57,256,963.5
HK$55,030,000.0
HK$54,604,557.4
HK$47,486,678.6
HK$45,927,507.6
HK$44,805,297.4
HK$40,779,439.4
HK$36,685,334.5
HK$36,056,853.5
Order
in
Current Dollars
Order
in
Constant Dollars
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
12
7
15
8
6
11
1
2
4
5
3
16
9
13
10
14
17
(Source: www.Asianboxoffice.com)
Adjust these for inflation using the Hong Kong CPI. Convert all of these film
grosses into 2004 dollars using 2004 as the reference year and rank the films by
their grosses in 2004 dollars.
12. All for the Winner
7. Justice My Foot
15. God of Gambers II
8. All's Well, End's Well
6. God of Gamblers Return
11. Fight Back to School
1. Kung Fu Hustle
2. Shaolin Soccer
4. Rumble In The Bronx
5. Infernal Affairs
3. First Strike
16. Flirting Scholar
9. Thunderbolt
13. Drunken Master II
10. Mr. Nice Guy
14. God of Cookery
17. All's Well, End's Well 1997
2.
You are given some statistical accounts for the country of Fruitopia which
produces two goods, Apples and Oranges. The accounts contain information on
the price of apples and the price of oranges for the years 1995 to 2005. You are
asked to calculate a CPI, nominal GDP, real GDP and the GDP deflator using
1995 as the base year. Note that there is no investment, government spending,
exports or imports in Fruitopia so GDP is equal to consumption.
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Apples
price
quantity
$1.00
100
$1.10
105
$1.21
110
$1.33
115
$1.46
120
$1.61
125
$1.77
125
$1.95
130
$2.14
135
$2.36
140
$2.59
145
Oranges
price
quantity
$2.00
100
$2.40
105
$2.88
100
$3.46
100
$4.15
100
$4.98
95
$5.97
90
$7.17
90
$8.60
85
$10.32
80
$12.38
75
a. Calculate the CPI. The representative market basket for the Fruitopian
consumer is 100 apples and 100 oranges. Calculate the cost of this market
basket in 1995. The CPI in subsequent years is the price of this same
market basket (100 apples and 100 oranges) relative to price of that basket
in the base year (multiplied by 100).
b. Calculate the nominal GDP which is the sum of the market value of apples
(price × quantity) plus the market value of oranges in each period.
c. Calculate real GDP which is the sum of the market value of apples
calculated using the 1995 price (1 × quantity of apples) plus the value
oranges calculated using the 1995 price (2 × quantity of oranges).
d. Calculate the GDP deflator as the ratio of the nominal GDP to the real
GDP.
e. Calculate the average inflation rate using both price measures. Which
price index increases the most over time? Explain. Notice that the market
basket has switched toward apples whose price has not risen sharply over
time.
CPI
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
100
116.6667
136.3333
159.5667
187.0433
219.5717
258.1176
303.836
358.1074
422.5836
499.2405
CPI
Inflation
16.67%
16.86%
17.04%
17.22%
17.39%
17.56%
17.71%
17.86%
18.00%
18.14%
Nominal Real
GDP
GDP Deflator
GDP
GDP
Deflator
Inflation
$300.00
300
100.00
$367.50
315
116.67
16.67%
$421.10
310
135.84
16.43%
$498.67
315
158.31
16.54%
$590.41
320
184.50
16.55%
$674.09
315
214.00
15.99%
$758.92
305
248.83
16.28%
$898.31
310
289.78
16.46%
$1,020.35
305
334.54
15.45%
Avge
$1,155.68
300
385.23
15.15% Avge
17.44% $1,304.85
295
442.32
14.82%
16.03%
The apple price rises much more slowly than the orange price. As a result, the
consumption basket switches to apples and away from oranges. The GDP deflator
measures the cost of the current market basket. The CPI inflation which is measured as if
the market basket were fixed at 1995 levels contains more high inflation oranges in it and
thus displays higher inflation.
3.
It is 2005. You are in charge of deciding compensation for regional managers of
an American multi-national firm. In the United States, managers receive a pay
package worth US$150,000. Calculate the amount that you would have to pay
these managers in local currency that would allow them to have a purchasing
power equivalent to what managers get in the United States.
Indonesia
Japan
Korea
Malaysia
Singapore
Thailand
US Salary
$150,000
$150,000
$150,000
$150,000
$150,000
$150,000
PPP Equivalent
Local Currency
Salary
590,139,000
19,432,500
118,338,000
259,500
162,000
2,389,500
Cost in
US
Dollars
PPP
S
60,809.36 3934.26 9704.74
176,306.48
129.55
110.22
115,550.91
788.92 1024.12
68,469.66
1.73
3.79
97,590.36
1.08
1.66
59,410.74
15.93
40.22
a. Use 2005 PPP conversion factors that can be downloaded from the World
Bank, which are available here or as hard copy in class:
http://home.ust.hk/~davcook/icp-summary.pdf
Use 2005 Purchasing Power Parities to calculate how much providing would
cost the parent company in the currency of the relevant country. Convert your
answers to US dollars using the exchange rates available at the World Bank
site.
To derive the convert from US $ to Ref country currency using PPP method use the
PPP REF
formula US Salary 
where PPPUS = 1 by definition. Therefore, to get the
PPPUS
amount of local currency necessary to buy the same living standard that $150K would
buy in US just multiply by PPPREF. To calculate how many US dollars this would cost the
S US
parent company, just use the formula Local Currency Salary  REF where again by
S
US
definition S = 1.