Problem Set One - GDP and Monitoring Jobs and Inflation

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This problem set covers chapter 4-GDP and chapter 5-Monitoring Jobs and Inflation. Submission is on VIULearn=>Assessment=>Assignment=> Problem Set #1. If you are working in group with another student, you can submit one assignment with both names on the first page. All work needs to be typed, hand written not accepted.

1. Classify each of the following items as a final good or service or an intermediate good or service and identify each item as a component of consumption expenditure, investment, or government expenditure on goods and services.

a. Banking services bought by a student.

b. New cars bought by Hertz, the car rental firm.

c. Newsprint bought by the National Post.

d. A new limo bought for the prime minister.

e. A new house bought by a household.

2. GDP history and uses.

a. Who first developed the modern concept of GDP, when?

b. What is the difference between nominal GDP and real GDP? What are their uses?

3. Use GDP data from OECD, Pick any five countries and rank them according to their GDP Per Capita in 2019.

a. Display the GDP per capita and rankings of these five countries.

b. Use the “2019 World Happiness Report” published by the United Nations, find out the rankings of your five countries and their happiness scores.

c. Research what is the Human Development Index (HDI) developed by the United Nations? Explain why the HDI might be better than real GDP as a measure of economic welfare.

4. Use the data below to answer the questions that follow

a. Calculate the real GDP growth rate and the inflation rate from year 2 to year 3.

b. Calculate the official unemployment rate and labor participation rate for year 1 and year 2.

c. What are the changes in the calculated unemployment rates and participation rates from year 1 to year 2? Explain what might have led to such changes?

d. Calculate the natural rate of unemployment for Year 1. State what types of unemployment exist when economy is at full employment?

e. If discouraged workers are included in the calculations for year 1, what are the new unemployment rate and labor force participation rate?

5. The total CPI measures the cost of living for a typical household by multiplying the price for each category of expenditure (housing, food, and so on) by a measure of the importance of that expenditure in the average consumer’s market basket and summing over all categories. However, using data from the consumer price index, we can see that changes in the cost of living for different types of consumers can vary a great deal.

Lets’ compare the cost of living for a hypothetical retired person and a hypothetical university student. Assuming their market baskets are allocated according to the following table:

The table below shows the April 2012 CPI for each of the relevant categories (2002 base year).

a. Calculate the CPI for the retired person and for the university student. 

b. The total CPI in April 2012 was 122.2. How do your calculations for a CPI for the retired person and the university student compare to the total CPI?

c. CPI based inflation rate tends to overstate or understate the true increase of the cost of living? What are the main sources of bias in the CPI? Explain.

d. List two consequences of the bias in CPI.

6. Read the “Economics In Action” attached in the next page and answer the following questions.

a. Research what is “shoe leather cost” and “menu cost”.

b. What other costs of inflation you would expect when there is a sudden spike of inflation rate?