Revise Answers for Macro Project and Fill In Incomplete Ones

Section 1

A)

The Slope of the PPF would be (-100/1000) or (-1/10)

The opportunity cost for producing 1000 tons of Taters/Day is 100 barrels of Pipeweed and the opportunity cost of producing 100 barrels/day of Pipeweed is 1000 Tons of Taters

B)

The Slope of the PPF would be (-150/1500) or (-1/10)

The opportunity cost for producing 1500 tons of Taters/Day is 150 barrels of Pipeweed and the opportunity cost of producing 150 barrels/day of Pipeweed is 1500 Tons of Taters.

C)

The Slope of the PPF would be (-300/1500) or (-1/5)

The opportunity cost for producing 1500 tons of Taters/Day is 300 barrels of Pipeweed and the opportunity cost of producing 300 barrels/day of Pipeweed is 1500 Tons of Taters.

D)

The Slope of t he PPF would be (-150/750 ) or (-1/5)

The opportunity cost for producing 750 tons of Taters/Day is 150 barrels of Pipeweed and the opportunity cost of producing 150 barrels/day of Pipeweed is 750 Tons of Taters.

Section 2

A) The opportunity cost for Farmer Cotton for producing 1 barrel ofpipeweed is 1.5 tons of Taters.

The opportunity cost for Farmer Cotton for producing 1 ton of Taters is 2/3 barrels of Pipeweed.

The opportunity cost for Gaffer for producing 1 barrel ofpipeweed is 2 tons of Taters.

The opportunity cost for Gaffer for producing 1 ton of Taters is 1/2 barrels of Pipeweed.

B)

The slope of the PPF is -2/3

The slope of the PPF is -2/4 or -1/2

C) Yes Gaffer should specialize in the production of Taters as either he can produce 4 tons of Taters or he can produce 2 Barrels of Pipeweed, whereas Farmer Cotton can either produce 3 tons of Taters or 2 Barrels of Pipeweed. Thus we know that Gaffer is in an advantageous position in the production of Taters and thus he should specialize in that and Farmer Cotton should produce Pipeweed and they both can enter into a barter agreement.

D) The terms of trade for Pipeweed would be1 barrel of Pipeweed would be exchanged for 2 tons of Taters and 1 tons of Tater would be exchanged for ½ barrel of Pipeweed.

Section 3

A) ?????

B)?????

C)?????

Section 4

A) The CPI Basket for Rohan for the base year can be calculated as

Summation of all the different commodities (Price of Commodity in 3015*Quantity of the Commodity in 3016)/ Summation of all the different commodities (Price of Commodity in 3015 *Quantity of the Commodity in 3015)*100

Thus by using the above formula we have CPI for Rohan for 3015 as 100 as 3015 is the base year.

Similarly the CPI for 3016 will be calculated as

Summation of all the different commodities (Price of Commodity in 3016*Quantity of the Commodity in 3015)/ Summation of all the different commodities (Price of Commodity in 3015 *Quantity of the Commodity in 3015)*100

Thus in this case the CPI would be 105.53

Similarly the CPI for 3017 will be calculated as

Summation of all the different commodities (Price of Commodity in 3017*Quantity of the Commodity in 3015)/ Summation of all the different commodities (Price of Commodity in 3015 *Quantity of the Commodity in 3015)*100

Thus the CPI for 3017 is 109.18

Similarly the CPI for 3018 will be calculated as

Summation of all the different commodities (Price of Commodity in 3018*Quantity of the Commodity in 3015)/ Summation of all the different commodities (Price of Commodity in 3015 *Quantity of the Commodity in 3015)*100

Thus the CPI for 3018 is 114

Similarly the CPI for 3019 will be calculated as

Summation of all the different commodities (Price of Commodity in 3019*Quantity of the Commodity in 3015)/ Summation of all the different commodities (Price of Commodity in 3015 *Quantity of the Commodity in 3015)*100

Thus the CPI for 3019 is 126.35

B) The inflation rate between 3016 and 3019 would be

C) ?????????

D) The Inflation rate between 3015 and 3018 would be (114-100)/100*100 or 14%

Thus the prices of commodities on real terms would be

Rohan Market Basket Good	3015 Price (marks)	3018 Real Price (marks)	3018 Nominal Prices
War Horse	$100.00	$114.00	$110.00
Armor	$20.00	$22.80	$23.00
Helm	$5.00	$5.70	$6.50
Sword	$15.00	$17.10	$18.00
Spear	$10.00	$11.40	$10.50
Saddle	$15.00	$17.10	$15.00
Bridle	$5.00	$5.70	$5.00
Hay	$1.50	$1.71	$3.00
	bale	bale	bale
Oats	$2.50	$2.85	$5.50
	bushel	bushel	bushel
Stabling	$50.00	$57.00	$44.00
	year	year	year
Vet Services	$50.00	$57.00	$50.00
	year	year	year

Thus we can see that in real terms Armor, Helm, Sword, Hay, Oats are prices lower as compared to 3015.

E) The real GDP for any year is calculated as

Summation of all commodities (Quantity Produced in that year*Prices for Base Year)

The Nominal GDP is calculated as

Summation of all commodities (Quantity produced in that year*Prices of that year)

Thus the below table shows the Real and Nominal GDP for different years

Year	Real GDP	Nominal GDP
3015	$ 425.00	$ 425.00
3016	$ 525.50	$ 549.00
3017	$ 541.50	$ 583.50
3018	$ 622.00	$ 702.00
3019	$ 600.00	$ 731.00

Section 5

A) Labor force includes employed and unemployed persons i.e. persons working, unemployed persons

In 3019 labor force = 3200 + 1000= 4200

B) People who are unwilling to work will be total population – (person under 16 + Person in institutions + persons in military + persons working + unemployed persons)

25750 – (8250+500 + 11000 + 3200+1000)

= 1800

C) Employment rate = Employed / civilian non-institutional population

= 3200/(3200+1000+1800) = 53.33%

Unemployment rate = unemployed / Labor force

= 1000/4200 = 23.81%

Participation rate = (employed + unemployed)/ civilian non-institutional population

= 4200/6000 = 70%

D) Unemployment rate in 3018 = 1500 / Labor force = 1500 / (3500 + 1500) = 70%

Unemployment rate is exactly same in 3019 and 3018. Hence Eowyn’s observation of increase in unemployment does not hold good. Though the unemployed persons have increased in absolute terms in 3019, the unemployed persons to labor force has remained constant.

E) Fictional unemployment (FU)

Structural unemployment (SU)

Fictional unemployment Rate (FUR)

Structural unemployment Rate (SUR)

Natural unemployment Rate (NUR)

Cyclical unemployment Rate (CR)

Unemployment Rate (UR)

FU = 420 so FUR = 420/ 4200 = 10%

SU = 210 so SUR = 210/4200 = 5%

NUR = FUR + SUR = 15%

As UR is not equal to NUR

UR = NUR + CR

23.81% = 15% + CR

CR = 8.81%

Section 6

A) National income = Employee compensation + Corporate profits + Proprietors’ income + Rental income of persons + Net interest

Compensation of employees	1,680
Corporate profits	188
Proprietors income	150
Rental income	31
Net interest	147
National Income	2,196

Thus the National Income is $ 2196

B) Personal income = National income – Contribution for social insurance – Corporate retained earnings + Non business interest + Transfer payments from government and business

	National Income	2,196
Less	Social Security taxes (Social Insurance taxes)	222
	Undistributed corporate profits	111
Add	Transfer payments	66
	Personal Income	1,929

C) Disposable income = Personal income – Personal income taxes

Or (1929-45) or $ 1884

Gross domestic product = Gross national product – Net factor payments from abroad

Where Gross national product = Net national product + Depreciation

Net national product = National income + Sales and excise taxes + Business transfers – Net subsidies to government businesses + Statistical discrepancy

Net national product = (2196 + 146) or 2342

Gross national product= (2342+295) or 2637

Gross domestic product= (2637 + 0) or 2637

D) ????????

Section 7:

A) Real GDP per capita = Real GDP/Population

Thus,

	3015	3016	3017	3018	3019
Real GDP	$295,000	$317,000	$342,000	$376,000	$380,000
Population	99,135	102,109	105,172	108,327	111,577
Real GDP per capita	$2.98	$3.10	$3.25	$3.47	$3.41

B) Annual Real GDP growth rate = (This year’s GDP – Last year’s GDP)/Last years GDP

Thus,

	3015	3016	3017	3018	3019
Real GDP	$295,000	$317,000	$342,000	$376,000	$380,000
Population	99,135	102,109	105,172	108,327	111,577
Annual Real GDP growth rate		7.46%	7.89%	9.94%	1.06%

Population growth rate = (Last year’s population – this year’s population) / Last year’s population

	3015	3016	3017	3018	3019
Real GDP	$295,000	$317,000	$342,000	$376,000	$380,000
Population	99,135	102,109	105,172	108,327	111,577
Population growth rate		3.00%	3.00%	3.00%	3.00%

Per-capita real GDP growth rate = (Last year’s per-capita real GDP – This year’s per-capita real GDP) / Last year’s per-capita real GDP

	3015	3016	3017	3018	3019
Real GDP	$295,000	$317,000	$342,000	$376,000	$380,000
Population	99,135	102,109	105,172	108,327	111,577
Real GDP per capita	$2.98	$3.10	$3.25	$3.47	$3.41
Real GDP per capita growth rate		4.33%	4.74%	6.74%	-1.88%

C) Average annual growth in real GDP for the period between 3015 to 3019 = ((Real GDP in 3019 – Real GDP in 3015) / Real GDP in 3015)/5

= ((380,000-295,000)/295,000)/5 = 28.81/5 = 5.76%

To double the economy size:

Current GDP *((1+ Average annual growth in real GDP) ^ N) = New GDP

1.0576 ^ N = 2

N log (1.0576) = log 2

N = Log 2 / Log (1.0576)

N = 12.377 years

D) ??????

The labor market and the production function determine the position of the full employment (FE) line. The equilibrium level of employment is determined in the labor market. Plugging the equilibrium level of employment into the production function gives the full-employment level of output. The FE line is vertical at that point. The FE line shifts to the right if there is an increase in labor supply, an increase in the capital stock or if there is a beneficial supply shock.

Not able to draw labor market as the wage rate is not given. We need to find the demand and supply in the labor market. Then the equilibrium of labor market is mapped to Aggregate production function to find the real GDP value at equilibrium.

E) ????????

F) Technological advances increase the efficiency of the capital stock in Middle Earth so that more output can be produced from the same resources. Thus, the production function in Labor market graph shifts up. Because it reflects greater productivity of labor, firms will increase their demand for labor, and the demand curve for labor shifts to new equilibrium in aggregate production function. With the improvement in technology, employment and potential output rise.

Section 8

A) In economics, net investment refers to an activity of spending which increases the availability of fixed capital goods or means of production. It is the total spending on new fixed investment minus replacement investment, which simply replaces depreciated capital goods.

Thus in the given question the Net Investment would be (500-400) or $ 100

B) ?????

C) ?????

D) ?????

E) ?????

Production Possibility Frontier of Farmer Cotton

3 0 0 2

Quantity of Taters/Day (3 Tonnes)

Quantity of Pipeweed/Day (2 Barells)

Production Possibility Frontier of Gaffer

4 0 0 2

Quantity of Taters/Day (3 Tonnes)

Quantity of Pipeweed/Day (2 Barells)

Aggregrate production function

Real GDP 99135 102109 105172 108327 111577 295000 317000 342000 376000 380000

Production Possibility Frontier

1000 0 0 100

Quantity of Taters/Day (1000 Tonnes)

Quantity of Pipeweed/Day (100 Barells)

Production Possibility Frontier

1500 0 0 150

Quantity of Taters/Day (1000 Tonnes)

Quantity of Pipeweed/Day (100 Barells)

Production Possibility Frontier

1500 0 0 300

Quantity of Taters/Day (1000 Tonnes)

Quantity of Pipeweed/Day (100 Barells)

Production Possibility Frontier

750 0 0 150

Quantity of Taters/Day (1000 Tonnes)

Quantity of Pipeweed/Day (100 Barells)