ECON 304 Summer 2013 Homework 1

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ECON 304 – Summer 2013 Homework 1 Due date: Tuesday, May 21 in class

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Please be sure to include this page as the first page of your answer. Also please STAPLE! Thank You!

1. You will need the following links for answering this question: Nominal Wage (call it W) and Consumer Price Index (call it P) in the US economy[footnoteRef:1]. [1: If you are interested you can have access to a huge data set in Federal Reserve Economic Data (FRED) by this website.]

We want to study two recessions in the US economy. The following table shows the periods of these recessions[footnoteRef:2]: [2: If you are interested you can look at this link of National Bureau of Economic Research (NBER) for “US Business Cycle Expansions and Contractions”.]

	period of recession (month/year)
1	11/1973 – 03/1975
2	12/2007 – 06/2009

A) For each recession, calculate the real wage, that is W/P, for the beginning and ending date of the recession. For each recession, what is the percentage change in the real wage from the first month to the last month?

B) The period of 01/1997 – 12/2000 is usually called the New Economy that describes the excellent performance of the US economy. Calculate the real wage for the first and last month of this period. Then calculate the percentage change in the real wage during the period.

C) Click on this link for number of employees (call it N) in the US economy. In the link, you see a graph. Just above the graph if you click on “Download Data in Graph” you can download the data in excel format. Now, calculate the percentage change in N for the period 12/2007 – 06/2009 and for the period 01/1997 – 12/2000. Compare your results.

2. We want to study how one can measure the annual economic growth rate for a country. You will need the following links for answering this question: Nominal GDP (call it X) and Inflation (calculated according to GDP Deflator) (call it P).

Let us also call the real GDP as variable Y. That is . Then, remember from the class that by an approximation, we have:

We would like to use this approximation since we do not have a direct access to price levels. For each country, note that is the economics growth rate, that is, the percentage change in the real GDP from one year to the next year. Also note that is simply the inflation. From the links above find , and (You need to find the inflation rate in year 2010). Then calculate and for each country in the table.

China	United Kingdom	Nigeria	France

3. Suppose we have a simple Wood Economy described as follows. There are two firms in this economy. The first one is named PennWood who produces two types of output: paper and lumber of wood. The second firm is named BestWood who produces tables and chairs.

The following chart describes the relevant revenue and cost information for our simple Wood Economy:

PennWood

Rent on land $ 300,000 Wages paid to employees 800,000 Taxes paid to government 300,000 Revenue from selling lumbers of wood to BestWood 2,600,000 Revenue from selling papers to public 700,000

BestWood

Lumber wood purchased from PennWood $ 2,600,000 Rent on land 200,000 Wages to employees 1,200,000 Taxes paid to government 200,000 Revenue from selling chairs and tables to public 6,000,000

Calculate nominal GDP using (a) the expenditure approach (b) the production (added value) approach, and (c) the income approach and show that all three give the same answer.

Hint: For the income approach we should consider four agents: employees, firm owners, the government, and land owners.

4. Suppose that David has $1000. In the beginning of a year he decided to put his money in a saving account with 5% interest rate per year. The CPI was 150 in the beginning of that year. He expected that the CPI would be 153 in the beginning of the next year. However, it turned out that the CPI was 156 in the beginning of the next year.

A) Calculate the inflation rate, the actual ex-post real interest rate, and the expected real interest rate.

B) Why the actual ex-post real interest rate is different from the expected interest rate? Explain what features of the economy can generate this gap.

C) Suppose David had another alternative. There was a one-year government bond at the beginning of the first year for $1,000. He would receive principal plus interest totaling $1,020 at the beginning of the next year. According to his expectation, did David decide rationally on putting his money in the saving account instead of buying the bond?

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