Queens University

Department of Economics

Econ 222B

Fall 2000

Assignment #1

Solutions:


Q1. Recall that a normative statement is one that involves both analysis of the consequences of policy and value judgements about the desirability of those consequences.


(a) Normative. Should, in this context, indicates a value judgement on a policy.

(b) Positive. Should, in this statement, is merely indicating an expected result, an analysis. No judgement is made about the desireability of the consequences.

(c) Positive. This statement is just analysis. No judgement as to whether the consequences (unemployment) are good or bad.

(d) Normative. Must, in this statement is a judgement of how government moneys should be used.



Q2. Calculations below:


Growth rate of output = 100*[Output(2000) - Output(1999)] / Output(1999)

= 100*[8000-9000] / 9000 = -11.1%

Growth rate of Average Labour procductivity = 100*[10-10]/10 = 0

note: average labour productivity = output/employment

Inflation rate = [Prices(2000)-Prices(1999)] / Prices(1999) = -5.6%

Unemployment Rate = 100* Number Unemployed / Number in Labour Force

note: labour force = number unemployed + number employed

so Unemployment Rate(2000) = 100* 100/900 = 11.1%

and Unemployment Rate(1999) = 100* 100/1000 = 10%


Q3.


(a) True

Tuition expenditures of foreign students in Canada are included in GDP because they are payment for services produced in Canada. These expenditures are also part of GNP because they are payments to domestic factors of pruduction (staff and faculty of Canadian Universities)


(b) False

The value added = income generated = wages + taxes + profits = $47 thousand.


(c) False/Uncertain

Measured GDP might not be a reliable measure of aggregate economic activity because it might underestimate aggregate production.

The following are some examples of how GDP might underestimate:


i) Some goods and services aren't sold in formal markets (so they aren't included in the measure of market value of final goods and services, GDP or GNP)

e.g. home making and child care services are often provided free of cost or pollution reduction such as community clean ups provided free of cost


ii) some goods and services are bought and sold on black or underground markets (so although they have a market value, they arent included in the formal measures GDP or GNP)

e.g. drug sales, prostitution and other market activities that are not permitted by some nations or under the counter work that is not reported to the government in order to avoid taxes.


iii) some goods and services dont have a correct market value attached because they are provided by the government as public goods and services, so the proxy value that is attached to these goods and services is the cost of providing them, not the actual service that is provided

e.g. national defense, education, police force, etc. So we may improve the value of National Defense provided by the government by introducing new mass destruction weapons, but these weapons result in less necessity to keep and pay a large standing army. Therefore, the cost of defense has gone down, but the value of the defense services we receive has gone up (wont be accurately measured if we only have cost as a proxy in GDP)



(d) True

What is logged in GDP is inventory investment, that is the amount by which inventories increase during the year. So if a business' inventory at the beginning of 1999 equals their inventory at the start of 2000, then inventory investment is zero; zero is insignificant.


(e) Uncertain

Uses of Savings Equation is : Spvt = I + (-Sgvt) + CA

So, if Spvt doesn't change and Sgvt becomes increasingly negative, so -Sgvt increases then either I or CA must decrease (not decrease). Because this is an identity we must have equality. If CA remains constant, then I must be the one to increase.
Thus, In a closed economy this statement is true. Higher gov't deficit would crowd out investment. However, in an open exonomy part of the deficit can be financed from foreign borrowing (CA deficit can change)


(f) True

Recall: GDP + NFP = GNP, so GDP = GNP - NFP

Since NNP + DEP = GNP
Then GDP = NNP + DEP



Q4.

Exports = domestically produced goods that are sold abroad = $5 million of hay

Imports = goods bought from foreign countries = $2 million of wheat

Net Exports(NX) = Exports - Imports = $5 million - $2 million = $3 million

NFP = foreign payments to domestic factors of production abroad less payments from home to foreign factors of production at home

= $1 million survey services abroad - 0 services domestically
= $1 million

CA Balance = NX + NFP = $3 million + $1 million = $4 million

GDP = all goods and services produced domestically (that is, in Mumba)

= $20 million coconuts + $10 million in hay + $1 million in domestic survey services
= $31 million

GNP = all output (goods and services) produced by national (Mumbonians)

= $10 million in hay + $20 million in coconuts + $2 million in land surveying
= $32 million

Alternativeley:
GNP = GDP + NFP = $31 million + $1 million = $32 million

= all goods and services produced by domestic factors of production.


Q5. (a) A Fixed-Weight Price Index (FWPI) is a measurement of how much a FIXED basket of goods costs relative to the base year period. An example of a Canadian FWPI is the Consumer Price Index (CPI). Below is the calculation of the FWPI for Mumba for 1999 and 2000.


  • Fixed-Weight Price Index

    =

    (Base year production at Current prices)

    • (Base year production at Base year prices)

     

    FWPI99 = ((1*50,000) + (2*20,000))/((1*50,000) + (2*20,000)) = 1

    FWPI00 = ((1.5*50,000) + (2*20,000))/ ((1*50,000) + (2*20,000)) = 1.27

    Inflation = 27%



    Q5. (b) A Variable-Weight Price Index (VWPI) is a measurement of how much the set of goods and services produced at todays costs compare with how much they cost in the base year. An example of a Canadian VWPI is the GDP Deflator. Below is the calculation for the VWPI for Mumba for 1999 and 2000


  • Variable-Weight Price Index

    =

    (Current output at Current Prices)

    (Current output at Base Yr Prices)

    • VWPI99 = 1

    VWPI00 = 1.25

    Inflation = 25%



    Q5. (c) The inflation rate using the VWPI is 25% while the inflation rate using the FWPI is 27%. It is important to note that these will be different as different ratios of each goods are purchased in each period. Inflation is slightly overstated using fixed-weight compared to variable-weight since the current bundle has lower output of tea, whose price has increased by 50%. However, so long as the base year bundle is not bery different from the current year bundle, inflation rates will be very similar.

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