ECON 302: Intermediate Macroeconomic Theory (Spring 2013-14)
Discussion Section Week 1 January 24, 2014
SOME KEY CONCEPTS
-
Introduction to macroeconomics
Average labor productivity and other economic indicators
Measuring GDP: classication of items and calculation
Ination calculation
EXERCISE
Question 1 (Average Labor Productivity - Chapter 1)
Consider the following macroeconomic data for Country A, producing a single good, between the years 2011
and 2012.
Year
Output
Employment
Unemployed
Total labor force
Prices
1)
2)
3)
4)
What
What
What
What
is
is
is
is
the
the
the
the
2011
1000 units
100 workers
10 workers
110 workers
$1 / unit
2012
1500 units
120 workers
5 workers
125 workers
$1.20 / unit
average labor productivity in each year?
growth rate of average labor productivity?
unemployment rate in 2012?
ination rate between 2011 and 2012?
Question 2 (Average Labor Productivity - Chapter 1)
1) Can average labor productivity fall even though output is rising?
a. Yes, if output rises faster than employment
b. No, average labor productivity cannot fall if total output is rising.
c. Yes, if employment rises faster than output.
2) Which of the following cases would result in increased total output but a higher unemployment rate?
(Hint: It may be useful to list out all formulas to be used.)
a. With constant average productivity, the labor force increases, but employment increases more slowly than
unemployment.
b. With falling average productivity, the labor force increases, and unemplyment increases faster than
employment.
c. With constant average productivity, the labor force increases, but unemployment increases more slowly
than employment.
d. With falling average productivity, the labor force decreases, and unemployment increases faster than
employment.
1
Question 3 (Measuring GDP and the Components - Chapter 2)
Consider the following information of an economy.
- Gross private domestic investment = 35
- Goverment purchases of goods and services = 25
- Gross national product (GNP) = 340
- Current account balance = 30
- Taxes = 40
- Government transfer payments to the domestic private sector = 25
- Interest payments from the government to the domestic private sector = 15 (assume all goes to domestic
households.)
- Factor income received from rest of the world = 7
- Factor payments made to rest of the world = 9
- Assume that government investment is zero.
Find each of the following, it may be useful to list out the formula you will use as you move along.
1) Net factor payments from abroad
2) GDP
3) Net exports
4) Consumption
5) Private saving
6) Government saving
7) National saving
Question 4 (GDP Accounting - Chapter 2)
ABC Company builds computer components. It sells all its output to XYZ Company for $2.4 million. It
costs ABC $0.9 million in wages, $0.1 million in interest on debt and $0.2 million on taxes.
XYZ Company uses the components bought from ABC Company to build four supercomputers at $1 million
each, this accounts from $0.6 million in components, $0.3 million in wages and $0.1 in taxes. Three of the
supercomputers produced are sold to businesses at $1.8 million each. The only unsold is booked as a $1
million in inventory.
1) Using product approach, what is the total GDP contribution of these companies?
2) Using expenditure approach, what are the sold supercomputers counted as? What about the unsold?
3) Fill in the following table to calculate the GDP contribution of these companies.
ABC Company
XYZ Company
Wages to the employees of
Prots of
Taxes paid by
Interest paid by
GDP contribution by
Total GDP contribution
Question 5 (Ination - Chapter 2)
1) If the price index in year t and year t + 1 are 100 and 120, respectively, what is the ination rate in year t?
2) If the price index in year 0 and year n are P0 and Pn , respectively, the average annual rate of ination can
be written as
n
(1 + π) = Pn /P0
where π is the average annual ination rate. Solve for the expression π .
2
SOLUTION
Question 1
1)
2)
3)
4)
2011: 10 units/worker, 2012: 12.5 units/worker
25%
4%
20%
Question 2
1) c., since average labor productivity = output/employment,
2) a., from 1) and unemployment rate = employment/(employment + unemployment)
Question 3
1) NFP = 7 - 9 = -2
2) GDP = GNP - NFP = 340 - (-2) = 342
3) CA = NX + NFP, so NX = CA - NFP = 30 - (-2) = 32
4) Y = C + I + G + NX, so C = Y - I - G - NX = 342 - 35 - 25 - 32 = 250
5) Private saving = Private disposable income - Consumption = (Y + NFP - T + TR + INT) - C = (342 2 - 40 + 25 + 15) - 250 = 90
6) Government saving = (T - TR - INT) - G = (40 - 25 - 15) - 25 = -25
7) National saving = Private saving + Government saving = 90 - 25 = 65
Question 4
1) 3 x $1.8 million + $1 million = $6.4 million
2) Investment, inventory investment (increase in inventory)
3)
ABC Company
XYZ Company
Wages to the employees of
$0.9 million
$1.2 million
Prots of
$1.2 million
$2.4 million
Taxes paid by
$0.2 million
$0.4 million
Interest paid by
$0.1 million
$0 million
GDP contribution by
$2.4 million
$4 million
Total GDP contribution
$6.4 million
Question 5
1) 20%
p
1/n
2) π = (Pn /P0 )
− 1 = n Pn /P0 − 1
3