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Econ 116 Problem Set 1 Solutions

I True/False:1. True: The expenditure approach and the income approach to measuring GP !ield the sameresult. "hen mone! is spent #or a good or ser$ice% this is also income &hich is recei$ed b! the

#irm. This% in turn% goes to&ards pa!ing &ages or other expenses such as interest or taxes% and&hat remains is corporate pro#it.'. True: GP is the total $alue o# all goods produced and ser$ices pro$ided in a gi$en !ear. Thechild pro$ided a ser$ice &orth (') and% assuming this is reported% is thus counted in GP.*. True: In$entories are #inished goods &hich are produced b! a #irm% but not !et sold. +oldingall else constant% an increase in in$entories means that more goods &ere produced than sold in agi$en !ear. +o&e$er% GP measures the production% not sales% o# goods and ser$ices% andthere#ore an increase in in$entories% assuming e$er!thing else is unchanged% amounts to anincrease in GP.,. False: The measure o# unemplo!ment includes all indi$iduals &ho are acti$el! loo-ing #or aob% but do not ha$e a ob. !clical unemplo!ment% caused b! #luctuations in economic acti$it!%

is not the onl! reason #or unemplo!ment. The measure o# unemplo!ment also includes #rictionalunemplo!ment and structural unemplo!ment. Frictional unemplo!ment is the unemplo!mentthat results #rom short run matching problems. It ta-es time and e##ort #or &or-ers to search #or aob and emplo!ers to search #or &or-ers% and this #riction in the labor mar-et results in short rununemplo!ment. Structural unemplo!ment re#ers to the long run adustment problems resulting#rom changes in the structure o# the econom!% but is not related to economic #luctuations. Forexample% increases in international trade ha$e caused structural unemplo!ment domesticall!&hen #irms% and there#ore obs% ha$e mo$ed o$erseas.0. False: discouraged &or-er is someone &ho &as once loo-ing #or a ob% but has gi$en up.Since the &or-er is no longer acti$el! searching #or a ob% he or she is no longer counted as beingin the labor #orce% and there#ore is no longer included in the measure o# unemplo!ment. 2an!

complain that since the unemplo!ment measure does not include discouraged &or-ers% the trueunemplo!ment rate is underestimated.

II

1. '))3 I to '))3 II:

4uarterl! 5ate: nnual 5ate:

7.)))7).)).6,6%11

).6,6%11,.7'7%11==

3.')'3.)18))7.19 , ==

'))3 II to '))3 III

4uarterl! 5ate: nnual 5ate:

1*.)))1*.,.7'7%11

,.7'7%11,.71'%11==

0'.)))0'.)18))1*.)19 ,

==

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5esidential In$estment:

7.,),)7).)0.0:6

0.0:67.*0*==

;ote that this increase is o$er ' < !ears% or 1) =uarters% &hereas an annual rate is o$er ,=uarters. There#ore% the exponent !ou &ant to use is ,/1).

36.131336.)18,)7).)19 1),

==

'. The increase in sa$ings &as due to the tax rebate chec-s that &ere sent out b! the #ederalgo$ernment.

III

1. >n ?anuar! 16% the @AS announced that the change in the PI o$er the month o# ecember&as B).7. This is not gi$en at an annual rate% but instead as a monthl! rate. The mar-etexpected a change o# B).% so the di##erence bet&een the actual rate and the expected rate &asnot large enough to create a signi#icant reaction #rom the #inancial mar-et.

IC

1. To #ind the price le$el in a gi$en !ear using '))0 =uantit! &eights% multipl! the price o# eachgood in that !ear times the =uantit! purchased in '))0% and sum across goods.

'))0 Price Ae$el D 90 x 1))8 9, x 3)8 91) x '))8 91* x 0)8 9') x ')8 D *37)'))6 Price Ae$el D 97 x 1))8 9, x 3)8 910 x '))8 910 x 0)8 9'' x ')8 D 0'1)

Percent hange: 6.*,*,6.)*37)

*37)0'1)==

To #ind the price le$el in a gi$en !ear using '))6 =uantit! &eights% multipl! the price o# eachgood in that !ear times the =uantit! purchased in '))6% and sum across goods

'))0 Price Ae$el D 90 x 708 9, x 1))8 91) x '))8 91* x 0)8 9') x '08 D *'0'))6 Price Ae$el D 97 x 708 9, x 1))8 910 x '))8 910 x 0)8 9'' x '08 D 0''0

Percent hange: 1'.****1'.)*:'0

*:'00''0==

Since the price change o# each good is &eighted di##erentl!% the in#lation rates &ill be di##erentdepending on the base !ear used.

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To #ind nominal GP #or a gi$en !ear% multipl! the price o# each good times the =uantit!produced% and sum across goods:

'))0 GP D 90 x 1))8 9, x 3)8 91) x '))8 91* x 0)8 9') x ')8 D *37)'))6 GP D 97 x 708 9, x 1))8 910 x '))8 910 x 0)8 9'' x '08 D 0''0