1. This question studies GDP growth rates in large Canadian provinces. It uses the CANSIM database.

(a) Collect provincial GDP for B.C. (D44014), Ontario (D31830), and Quebec (D31808) for the period 1990-1995.

(b) Collect provincial population for B.C. (D11), Ontario (D7), and Quebec (D6) for the same period. Convert the data from quarterly to annual frequency using the average method.

(c) Calculate the annual growth rates in GDP per capita for each province for 1991-1995. Is it true that economic growth looks rapid in B.C. only because of population growth? Which province had the fastest growth in output per capita from 1994 to 1995?

2. An economist from the OECD is making a macroeconomic forecast for Canada for late 1996 and early 1997. She writes: "Inventory investment in Canada during the first three quarters of 1996 was negative. Demand is likely to be strong, and so output will grow rapidly in late 1996 and early 1997."

(a) Is the economist correct in her statement about inventory investment (D20473)?

(b) Why does this evidence lead her to forecast strong output growth?

3. Canada has large foreign debt, both private and public. Explain how this affects:

(a) the difference between GDP and GNP

(b) the difference between NX and CA.

4. It is well-known that short-term interest rates fell in Canada during 1996. This question examines medium-term nominal and real interest rates during the same period. To answer this question, retrieve the CPI (all items) for 1995 and 1996 (P700000) and the yield on 1-3 year government bonds (B14009) from CANSIM.

(a) Did this medium-term nominal interest rate fall during 1996?

(b) Did the medium-term expected real interest rate fall during 1996? (Hint: Assume that bonds have a maturity of exactly 12 months. Assume for simplicity that people forecast inflation over the next 12 months with the inflation rate over the past 12 months.)

5. Suppose that the aggregate production function in Canada can be thought of as:

Y = AK ^0.3N ^0.7.

Use the values for K, N, and A for 1992 from Table 3.1 in the textbook.

(a) What was MPK in 1992? What units is it measured in?

(b) What was MPN in 1992? What units is it measured in?

6. A typical plumbing firm's production function is given by:

Y = AK ^0.5N ^0.5.

It cannot change its capital stock in the short run, and K=1. Productivity is given by A=60.

(a) If the going real wage for plumbers is 17.32, how many plumbers will the firm hire to maximize its profits?

(b) Now suppose that in fact the total supply of plumbers in the labour market is completely inelastic. If productivity rises by 10 percent then what happens to the real wage?

(c) Is your answer in part (b) what you would predict to happen to plumbers' wages in the long run when there is an improvement in A in plumbing?

7. During the 1940s and 1950s, economic analysts at the U.S. CIA carefully studied economic growth rates in the USSR. Suppose that the analysts think that the production function is:

Y = AK ^0.2N ^0.8.

They found the following numbers as annual averages for the 1950s: (Change in Y)/Y = 0.056, (Change in K)/K = 0.08, (Change in N)/N = 0.04.

(a) What is their estimate of average annual growth in total factor productivity?

(b) Suppose that, unbeknownst to them, the production function really is:

Y = AK ^0.4N ^0.6

What was actual average annual TFP growth?

Please note that the notation ^ denotes a superscript term, and _ denotes a subscript term.

A.

r=0.08,P=1.5. Since e=3.2, we get e_{nom}=2.133

b) This policy will depreciate the domestic currency. So to maintain e_{nom}, the central bank will decrease M in order to decrease P. (No need for calculations).

c) If G increases, IS cuvre shift up and r increases. Y will increase, but not much due to a fall in NX. NX fall for 2 reasons: