Economics 222

Sections A and C

Assignment # 1

Fall 1998

Instructors: Lawrence McDonough; Ryan Davies

1. Nominal GDP in Canada was $779.1 billion in 1995 and $820.3 billion in 1996. The GDP deflator (base year 1987 = 100) was 181.1 in 1995 and 181.6 in 1996.
   
   a. What was the growth rate of nominal GDP between 1995 and 1996?
   
   b. What was the inflation rate from 1995 to 1996?
   
   c. What was the growth rate of real GDP from 1995 to 1996?
   
2. In July 1998, Ontario had a labour force of 6,022,000, employment of 5,590,000, and there were 3,102,000 people not in the labour force. Similarly, Newfoundland had a labour force of 239,300, employment of 197,400, and there were 205,495 people not in the labour force.
   
   a. Calculate the unemployment rates for Ontario and Newfoundland.
   
   b. Calculate the participation rates for Ontario and Newfoundland.
   
   c. Calculate the employment ratios for Ontario and Newfoundland.
   
   d. Provide a possible explanation for the (persistent) difference in participation rates between Ontario and Newfoundland.
   
   e. Is it possible to have both an increase in the unemployment rate and an increase in the employment ratio? Explain (in your own words).
   
3. Citizens of the tropical island country of Qwerty produce tomatoes and repair greenhouses. In 1993 they produced $25 million worth of tomatoes, with $21 million consumed domestically and the other $4 million sold to neighboring countries. They provided $19 million worth of greenhouse repair services, $15 million in Qwerty and $4 million in neighboring countries. They purchased $8 million worth of topsoil from neighboring countries.
   
   Calculate the magnitudes of GNP, GDP, net factor payments from abroad, net exports, and the current account balance. State and explain any assumptions that you might have to make.
   
4. This question investigates the sources of revenue and expenditures of the federal government using data available from the CANSIM Data Base. Note: You are only required to obtain the data necessary to answer the questions. The number in brackets refers to the CANSIM series number.
   
   Total revenue (D459000)
   --- Direct Taxes, Persons (D459001)
   --- Direct Taxes, Corporations and Government Business Enterprises (D459006)
   --- Direct Taxes, Non-residents (D459007)
   --- Indirect Taxes (D459008)
   --- Other Current Transfers from Persons (D459018)
   --- Investment Income (D459019)
   Total Current Expenditure (D459023)
   --- Current Expenditure on Goods and Services (D459024)
   --- Transfer Payments to Persons (D459029)
   --- Subsidies (D459046)
   --- Capital Assistance (D459066)
   --- Current Transfers to Non-residents (D459069)
   --- Interest on the Public Debt (D459072)
   --- Current Transfers to Other Levels of Government (D459073)
   Surplus (+) or Deficit (-) per National Accounts (D459101)
   
   

   a. State the percentage of total current expenditure that was spend on transfer payments to persons in 1996. What components of total current expenditure are used when calculating GDP using the expenditure approach? What happens to the other components?
   
   b. On a separate piece of paper, plot the interest on the public debt as a percentage of total current expenditures from 1970 to 1997. Describe the results.
   
   c. On a separate piece of paper, plot the surplus or deficit from 1970 to 1997. Describe the recent trend.
   
   d. As a result of accumulated government deficits, the federal government has a large debt. Since much of this debt is financed from foreign lenders, describe its effect on: (a) the difference between GDP and GNP; (b) the difference between NX and CA.
   

5. For 1997 the Canadian economy had the following nominal quantities (in millions of dollars) and price indexes (base year 1992 = 100) for each category of expenditure:
   

• a. Calculate the real quantity for each category.
• b. Calculate nominal and real GDP.
• c. Find the implicit price deflator (1992 = 100).

Answers

QUESTION 1

[5] b. [(181.6 - 181.1) / 181.1] * 100 = 0.28%

[5] c. real GDP 1995 = 779.1 / 1.811 = 430.2; real GDP 1996 = 820.3 / 1.816 = 451.7

Growth rate of real GDP = [(451.7 - 430.2) / 430.2] * 100 = 5.00%

QUESTION 2

Newfoundland: [(239,300 - 197,400) / 239,300] * 100 = 17.51%

[5] b. Ontario: [6,022,000 / (6,022,000 + 3,102,000)] * 100 = 66.00%

Newfoundland: [239,300 / (239,300 + 205,495)] * 100 = 53.80%

[5] c. Ontario: [5,590,000 / (6,022,000 + 3,102,000)] * 100 = 61.27%

Newfoundland: [197,400 / (239,300 + 205,495)] * 100 = 44.38%

[5] d. Newfoundland may have a larger number of discouraged workers. Newfoundland's persistently higher unemployment rate may have caused people to become so discouraged by the lack of success at finding a job that they stop searching. (Other reasonable answers will be accepted.)

[5] e. Yes, it is possible for the unemployment rate and the employment ratio to rise at the same time. For example, suppose the population falls, the labour force is constant, the number of unemployed rises, and the number of employed falls (but by less than the decline in population). Then the unemployment rate rises, since there are more unemployed but the same labour force, but the employment ratio rises, since population declines more than employment does.

QUESTION 3

The answer to this question depends on whether revenue from greenhouse repair services on other islands is classified as a service export or as a net factor payment from abroad. Either answer will be accepted.

Greenhouse repair services on other islands would be classified as a net factor payment under the following two scenarios:

i. the citizens of Qwerty are shareholders of an offshore company called Greenhouse Repair Services Co.. Residents of Qwerty receive income from this company in the form of Net Investment Income from Abroad.

ii. some citizens of Qwerty are year-round residents of the other islands. These residents repair greenhouses for a living on these other islands.

If greenhouse repair services on other islands are classified as a net factor payments, then the question is answered as follows:

[3] GNP= GDP + NFP = 32 + 4 = $36 million

[3] GDP = C + I + G + NX = [(25-4) + (19-4)] + 0 + 0 + (4-8) = $32 million

[3] Net factor payments from abroad = $4 million

[3] Net exports = -$4 million

[3] Current account balance = 0

Alternatively, greenhouse repair services on other islands would be classified as a service export under the following condition:

Citizens of Qwerty (who are also residents of Qwerty) occassionally leave the island to repair the greenhouses of neighbouring islands.

If greenhouse repair services on other islands is included in net exports, the question is answered as follows:

GNP = GDP + NFP = 36 + 0 = $36 million

GDP = C + I + G + NX = [(25-4) + (19-4)] + 0 + 0 + (4 + 4 - 8) = $36 million

NFP = 0

Net exports = $4 million - $4 million = $0 million

Current account balance = 0

Note: Because topsoil is used as an input in the production of tomatoes, it is not included in final consumption (C) for national income accounting.

QUESTION 4

Only current expenditure on goods and services is directly included in GDP as calculated by the expenditure approach. The other components of total current government expenditures, such as transfer payments to persons, are eventually included in GDP calculations as consumption and investment by individuals and companies. For example, employment insurance payments are not include in government purchases, but are eventually included in GDP when the EI recipient uses the money to buy groceries.

b. and c.

Date	[5] b. Interest on the public debt as a percentage of total current expenditures	[5] c. Surplus (+) or Deficit (-)
1970	12.6	247
1971	11.7	-139
1972	11.6	-530
1973	11.6	434
1974	10.7	1268
1975	10.7	-3823
1976	12.0	-3337
1977	11.9	-7343
1978	13.4	-10854
1979	15.6	-9383
1980	16.4	-10663
1981	19.2	-7315
1982	19.6	-20281
1983	18.7	-24993
1984	20.1	-30024
1985	21.9	-31424
1986	23.0	-23617
1987	23.2	-20704
1988	24.8	-19166
1989	27.1	-21055
1990	27.6	-25412
1991	25.5	-30398
1992	24.1	-29217
1993	23.3	-35131
1994	24.2	-28442
1995	26.8	-26566
1996	27.1	-15938
1997	26.7

A reasonable description of the data is adequate.

[10] d. Recall the relationships: GNP = GDP + NFP and CA = NX + NFP. Interest payments on a large foreign debt will contribute to large negative net factor payments from abroad (NFP). Thus, we expect that GNP < GDP and CA < NX.

QUESTION 5

Real government purchases = 168,459 / 1.034 = 162,920

Real fixed investment (business) = 140,325 / 1.062 = 132,133

Real fixed investment (government) = 18,241 / 1.027 = 17,760

Real change in inventories = 7,256 / 1.039 = 6,984

Real exports = 343,536 / 1.159 = 296,407

Real imports = 329,193 / 1.139 = 289,019

[5] b. Y = C + I + G + NX + INV

Nominal GDP = 854,520

Real GDP = 797,349

[5] c. Implicit price deflator = nominal GDP / real GDP * 100 = 107.2

END