Eco exam
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Econ3_ps1_sol.pdf
Problem Set 1 Solutions
ECON 3 − Principles of Macroeconomics
University of California San Diego
Christopher Gibson
Thursday, April 9th
1. For each of the following transactions, state the effect both on U.S. GDP and on the four
components of aggregate expenditure.
(a) Your mother buys a BMW made in North Carolina.
• Consumption increases by the cost of the car.
• GDP increases by the cost of the car.
(b) Your friend buys a SAAB imported from Sweden.
• Consumption increases by the cost of the car.
• Imports increase by the cost of the car.
• GDP is unchanged.
(c) You buy 10 shares of stock in Amazon.
• Stock purchase is a transfer of ownership, no GDP component is affected.
• GDP is unchanged.
(d) You buy 20 shares of stock in MercadoLibre, an Argentine-owned competitor of
Amazon. Stock purchase is a transfer of ownership, no GDP component is affected.
• Stock purchase is a transfer of ownership, no GDP component is affected.
• GDP is unchanged.
(e) You buy a used car from across the country and pay $1,000 to have it shipped to
you.
• The used car does not affect any component of current GDP.
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• Consumption increases by $1,000 from the service of the car being shipped.
• GDP increases by $1,000
(f) Nike produces 100,000 Air Jordan shoes and sells half to consumers for $90 each.
• Consumption increases by $4,500,000.
• Investment increases by $4,500,000 in the form of change in inventories.
• GDP increases by $9,000,000.
(g) Napa valley vineyards produces 40,000 bottles of wine priced at $10 each, exports
10,000 to New York, 10,000 to Canada, sells 10,000 to the U.S. government for its
upcoming holiday party, and stores the remainder.
• Consumption increases by $100,000 from New York purchase.
• Exports increase by $100,000 from Canada purchase.
• Government purchases increase by $100,000
• Investment increases by $100,000 in the form of change in inventories.
• GDP increases by $400,000.
2. Consider a small economy in which people eat carrots, draw exclusively economics graphs
with markers, and use tractors for the production of carrots.
Carrots Markers Tractors
Quantity Price Quantity Price Quantity Price
2010 1,200 $1.50 120 $2.50 5 $10,000
2011 1,300 $1.15 150 $2.45 7 $11,000
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(a)
NGDP2010 = Q c 2010 ·P
c 2010 + Q
m 2010 ·P
m 2010 + Q
t 2010 ·P
t 2010
= $1.50 · 1200 + $2.50 · 120 + $10, 000 · 5
= $52, 100.00
NGDP2011 = Q c 2011 ·P
c 2011 + Q
m 2011 ·P
m 2011 + Q
t 2011 ·P
t 2011
= $1.15 · 1300 + $2.45 · 150 + $11, 000 · 7
= $78, 862.50
RGDP2010 = Q c 2010 ·P
c 2010 + Q
m 2010 ·P
m 2010 + Q
t 2010 ·P
t 2010 = $52, 100.00
RGDP2011 = Q c 2011 ·P
c 2010 + Q
m 2011 ·P
m 2010 + Q
t 2011 ·P
t 2010
= $1.50 · 1300 + $2.50 · 150 + $10, 000 · 7
= $72, 325.00
(b)
GDPd2010 =
( NGDP2010 RGDP2010
) · 100 = 100
GDPd2010 =
( NGDP2011 RGDP2011
) · 100 =
( $78, 862.50
$72, 325.00
) · 100
= 109.04
According to GDP deflator, inflation from 2010 to 2011 is
π =
( 109.04 − 100
100
) · 100% = 9.04%
(c)
CPI2010 =
( Qc2010 ·Pc2010 + Qm2010 ·Pm2010 + Qt2010 ·P t2010 Qc2010 ·Pc2010 + Qm2010 ·Pm2010 + Qt2010 ·P t2010
) · 100 = 100
CPI2011 =
( Qc2010 ·Pc2011 + Qm2010 ·Pm2011 + Qt2010 ·P t2011 Qc2010 ·Pc2010 + Qm2010 ·Pm2010 + Qt2010 ·P t2010
) · 100
=
( $56, 674.00
$52, 100.00
) · 100 = 108.78
According to CPI, inflation from 2010 to 2011 is
π =
( 108.78 − 100
100
) · 100% = 8.78%
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(d) CPI and GDP deflator move in the same direction in this case, but have slightly
different values given that GDP deflator used 2011 quantities, while CPI used only
2010 quantities.
(e) It is probably not representative of the price burden faced by the consumer to include
tractors, so we might leave that out.
(f) Using the basket of goods leaving tractors out, CPI is as follows.
CPI2010 =
( Qc2010 ·Pc2010 + Qm2010 ·Pm2010 Qc2010 ·Pc2010 + Qm2010 ·Pm2010
) · 100 = 100
CPI2011 =
( Qc2010 ·Pc2011 + Qm2010 ·Pm2011 Qc2010 ·Pc2010 + Qm2010 ·Pm2010
) · 100
=
( $1, 674.00
$2, 100.00
) · 100 = 79.71
According to CPI, inflation from 2010 to 2011 is
π =
( 79.71 − 100
100
) · 100% = −20.29%
CPI without tractors actually indicates deflation, a dramatic difference from (c).
The reason is that while tractor prices increased, increasing GDP deflator, food and
marker prices actually decreased. If the consumer only cares about these two things
then the price burden has decreased as well, resulting in deflation.
3. Recall the definitions:
Labor force = Employed + Unemployed
Participation rate = Labor force
Working-age population
Unemployment rate = Unemployed
Labor force
Then if unemployment is 4% this leaves 96% employed. If 65% of the working age are
participating in the labor force this leaves 35% not in the labor force. It 35% of the
population is 50 million then the working-age population (Pop16+) is
(Pop16+) · 0.35 = 50m =⇒ (Pop16+) = 50m
0.35 ≈ 142.86m
Taking 65% of the working-age population of 142.86m gives a labor force of 92.86m. If 4%
of this total is unemployed and the rest are employed, we have all the necessary figures
to fill out the table.
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Working-age Employment Unemployment Participation
Not in
population labor force
Rate 100% 96% 4% 65% 35%
Total 142.62m 89.14m 3.71m 92.86m 50m
4. The following is a report from a BLS survey taker:
There were 65 people in the houses I visited, 10 of them children under 16;
25 people had full-time jobs, and 5 of them had part-time jobs. There were 10
retirees, 5 full-time homemakers, 5 full-time students over age 16, and 2 people
who were disabled and cannot work. The remaining people did not have jobs
but all said they would like one. One of these people had not looked actively for
work for 3 months, however.
If 10 people are under 16, the working-age population is 55. 30 people are employed, 22
are not in the labor force, leaving 3 people saying they would like a job. If one of these
people has not actively looked for work in 3 months this person is not in the labor force.
If we assume the remaining 2 people are actively looking, then the labor force is 32, and
there are 23 not in the labor force. If this is a representative sample, the statistics are as
follows.
Working-age Employment Unemployment Participation
Not in
population labor force
Rate 84.62% 93.75% 6.25% 58.18% 41.81%
Total 55 30 2 32 23
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