Economics 2

CALDWELL UNIVERSITY

SCHOOL OF BUSINESS AND COMPUTER SCIENCE

PRINCIPLES OF ECONOMICS II BU210/001

Fall 2020 Remote

3 credits Instructor: Prof. Anatoly Kandel, Ph.D

T, R 3:00-4:15 [email protected]

Remote Office Hours: see GoogleMeet

ESSAY II. GROSS DOMESTIC PRODUCT, INCREASING EFFICIENCY AS A ‘RESIDUAL,’ AND RETURNS TO SCALE.

TO BE HANDED IN BEFORE OCTOBER 6, 2020. THIS TIME, AN ABSENCE OF THE ESSAY BY OCTOBER 6 WILL BE AWARDED BY A ZERO SCORE. PERIOD.

Total 150 points

Question I. 40 pts. Testing your understanding of Nominal and Real GDP

I.1. 20 pts. Based on the information in Table 1, compute a deflator of GDP, 1972-2019, and explain the nature and functions of this deflator.

Table 1. The US GDP in current and ‘constant’ prices.

Years	GDP at current market prices, billions $$.	GDP at ‘constant’ prices, billions $$.	Deflator of GDP
1972	1,279	5,383
1982	3,343	6,805
1992	6,520	9,685
2002	10,936	13,493
2012	16,197	16,197
2019	21,433	19,092

YOUR ANSWER

I.2. 20 pts. Based on the information in Table 1, draw a graph of the dynamics of Nominal and Real GDP, 1972-2019, and explain it .

YOUR ANSWER

Question II. 50 pts. Explain the logic of separation of GDP into three parts: increase in output due to higher efficiency; increase in output due to expanded fixed capital; and increase in output due to expanding labor inputs.

II.1. 10 pts. Introduce notation, write down the production function (see class notes), and explain its logic.

YOUR ANSWER

II.2. 10 pts. Write down the production function without a ‘residual’ and explain

its logic.

YOUR ANSWER

II.3. 10 pts. Write down the production function with a ‘residual’ and explain its

logic.

YOUR ANSWER

II.4. 20 pts. Suppose that you computed contributions of higher efficiency,

expanded fixed capital, and expanded labor inputs into growth of GDP.

What is a typical range of these contributions for top industrialized national

economies and for least developed national economies? Explain your

answer.

YOUR ANSWER

Question III. 60 pts. Explain the concept of returns to scale and its practical applications.

III.1. 15 pts. Define increasing, constant, and decreasing returns to scale.

YOUR ANSWER

III.2. 15 pts. Graph increasing, constant, and decreasing returns to scale. Explain

your graph.

YOUR ANSWER

III.3. 30 pts Suppose that you are a top manager. Explain practical applications of

the concept of returns to scale.

III.3.1. 15 pts. You are a top manager in a small company.

YOUR ANSWER

III.3.2. 15 pts. You are a top manager in a gigantic company.

YOUR ANSWER