Macro exam 1
Fill in the missing data in the following table. Year Nominal GDP Real GDP GDP deflator 2007 $100,000 _________ 100 2008 ________ $110,000 108.0 2009 $130,000 $117,000 _____ 2010 $150,000 _______ 120.0 2011 __________ $136,000 125.0
$100,000 $118,800 111.1 $125,000 $170,000 Fig 6
Who has the comparative advantage in computers? In washing dishes? Could you draw their PPFS and find their opportunity costs for each? Homer: computers (0,1,2,3,4) washing dishes (12,9,6,3,0) Marge: computers (0,3,6,9,12) washing dishes (16,12,8,4,0)
Homer has the comparative advantage in dishes and Marge has the comparative advantage in computers. Opportunity cost: Homer 3 dishes, 1/3 computer Marge: 4/3 dishes, 3/4 computer
A friend of yours is reading a financial blog and comes to you for some advice about GDP. She wants to know whether she should pay attention to nominal GDP or real GDP. Which one do you recommend and why?
If your friend is comparing GDP numbers from different years, she should use real GDP. Using nominal GDP to calculate growth would give an inaccurate picture of growth if inflation were present. Specifically, it is impossible to tell whether growth in nominal GDP is due to growth in output or increases in prices. A simple example: suppose nominal GDP (in a very small country) was $1,000 at the end of 2015 and $2,000 at the end of 2016. Using nominal GDP, growth in 2016 was 100%. However, if 2016 real GDP in 2015 dollars was only $1,000, we know that inflation accounted for all of the growth in nominal GDP and that there was no growth in real GDP. In real terms, the economy did not grow, and people are no better off than they were before. If your friend used real GDP, she would have known that inflation accounted for the apparent increase in GDP. However, if your friend is just looking at GDP to get a sense of the size of an economy in today's dollars, then it makes more sense to use nominal GDP.
A mechanic builds an engine and then sells it to a customized body shop for $7,000. The body shop installs the engine in the car and resells it to a dealer for $20,000. The dealer then sells the finished vehicle for $35,000. A consumer drives off with the car. By how much does GDP increase? What is the value added at each step of the production process? How does the total value added compare with the amount by which GDP increased?
$35,000 would be the increase in GDP because that is the value of the final good. If you add up all of the value added at each step in the process, you will reach the same amount of $35,000.
Use a diagram to illustrate how each of the following events affects the equilibrium price and quantity of pizza. a. The price of mozzarella cheese rises. b. The health hazards of hamburgers are widely publicized. c. The price of tomato sauce falls. d. The incomes of consumers rise and pizza is an inferior good. e. Consumers expect the price of pizza to fall next week.
1. YOU NEED TO GRAPH ALL OF THESE AND SHOW THESE CHANGES! a. Supply decreases. Increases eq. price and decreases eq. quantity b. Demand decreases. Decrease eq price and quantity. c. Supply increases. Decrease eq. price and increase eq. quantity d. Demand decreases. Decrease eq price and quantity. e. So they are going to buy pizza next week and not now. Demand decreases now. Decrease eq price and quantity.
Real GDP for 2010 is less than nominal GDP for that year. But real GDP for 2000 is more than nominal GDP for that year. Why?
Because of the price level. Please make sure you know what this means. If the price level/GDP deflator is low (under 100) then it's possible for real GDP to be greater than nominal GDP.
A survey indicated that chocolate is Americans' favorite ice cream flavor. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits. c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream. d. New technology for mixing and freezing ice cream lowers manufacturers' costs of producing chocolate ice cream.
By reducing their herds, dairy farmers reduce the supply of cream, a leftward shift of the supply curve for cream. As a result, the market price of cream rises, raising the cost of producing a unit of chocolate ice cream. This results in a leftward shift of the supply curve for chocolate ice cream as ice cream producers reduce the quantity of chocolate ice cream supplied at any given price. Ultimately, this leads to a rise in the equilibrium price and a fall in the equilibrium quantity. b. Consumers will now demand more chocolate ice cream at any given price, rep- resented by a rightward shift of the demand curve. As a result, both equilibrium price and quantity rise. c. The price of a substitute (vanilla ice cream) has fallen, leading consumers to substitute it for chocolate ice cream. The demand for chocolate ice cream decreases, represented by a leftward shift of the demand curve. Both equilibrium price and quantity fall. d. Because the cost of producing ice cream falls, manufacturers are willing to supply more units of chocolate ice cream at any given price. This is represented by a rightward shift of the supply curve and results in a fall in the equilibrium price and a rise in the equilibrium quantity.
Are laser pointers and cats complements or substitutes?
Complements are goods that tend to be consumed or used together, whereas substitutes are goods that tend to be consumed or used instead of one another. Alternatively, complementary goods (i.e., complements) make each other more useful to the consumer, and substitute goods make each other less useful to the consumer. It's quite likely that, for most people, having a laser pointer makes a cat more entertaining (just look for videos online), and having a cat makes a laser pointer more entertaining.If this is the case, then cats and laser pointers tend to be consumed together and are in fact complements.
After some consideration, you decide to hire someone to help you move from one apartment to another. Wouldn't it be cheaper to move yourself? Do you think the choice to hire someone is rational? Explain your response.
Depending on the opportunity cost of moving by yourself, hiring movers might actually be lesscostly. Suppose that it costs $200 to hire movers to help you move, and if you move by yourself, itwould take you 8 hours. If the opportunity cost of those 8 hours is working a job that nets you $30hour (so $240 over 8 hours), then it definitely makes sense to hire movers, and it would be rationalto do so.
Refer to figure 2. Who has the absolute advantage in producing cola and pizza?Who has the comparative advantage in cola and pizza?Who should specialize in the production of each good and how much of it will they make?
Lozano has an absolute advantage in both goods. The opportunity cost of pizza in Lozano is the ratio of cola to pizza, or 25/15= 1.67, and the opportunity cost of pizza in Bilma is 12/7 = 1.7. Thus, Lozano has the comparative advantage in pizza and Bilma has the comparative advantage in producing cola. Loranzo will make pizza (15 units) and Bilma will make cola (12 units).
If Max receives an unemployment check, would we include that transfer payment from the government in this year's GDP? Why or why not?
No - transfer payments are not included in Gov purchases (G) in GDP because the money received by families in these payments gets spent when they purchase goods in C so if we added them in G, that money would be double counted.
Phil owns an old set of golf clubs that he purchased for $1,000 seven years ago. He decides to post them on Craigslist and quickly sells the clubs for $250. How does this sale affect GDP?
No affect
Wildcatland table: Calculate Nominal and Real GDP for this economy in each year. Let Year 1 be the base year. Also calculate the GDP deflator in each year. If you would like to test yourself and go the extra mile, also calculate the growth rate in Nominal and Real GDP from year to year and compare them. Why are the growth rates different?
Nominal GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600 Nominal GDP in Year 2 = ($12 × 200) + ($15 × 300) = $6,900 Nominal GDP in Year 3 = ($14 × 180) + ($18 × 275) = $7,470 Using Year 1 as the Base Year: Real GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600 Real GDP in Year 2 = ($10 × 200) + ($12 × 300) = $5,600 Real GDP in Year 3 = ($10 × 180) + ($12 × 275) = $5,100 (Note that nominal GDP rises from Year 2 to Year 3, but real GDP falls.) GDP deflator for Year 1 = ($3,600/$3,600) × 100 = 1 × 100 = 100 GDP deflator for Year 2 = ($6,900/$5,600) × 100 = 1.2321 × 100 = 123.21 GDP deflator for Year 3 = ($7,470/$5,100) × 100 = 1.4647 × 100 = 146.47 Growth rates of real GDP here. Year 1-Year 2 = ((5600-3600)/3600)*100% Year 2 - Year 3 = ((5100-5600)/5600)*100% - note that this will be negative which is true when a recession happens
Describe the difference between inferior goods and normal goods. Give an example of each type of good.
Normal and inferior goods differ in how the demand for them reacts to changes in income. The demand for normal goods reacts positively to changes in income: in other words, when income increases, the demand for normal goods increases, and when income decreases, the demand for normal goods decreases. The demand for inferior goods, in contrast, reacts negatively to changes in income: an increase in income results in a decrease in demand for inferior goods, and a decrease in income results in an increase in demand for inferior goods. An example of normal goods would be a pair of Air Jordan shoes, clothesfrom designer stores, Starbucks coffee, an Apple watch, a house, etc., or the things that consumerstend to buy more of when their income increases. Most of the goods are normal goods. But there are a few examples of inferior goods, including ramen noodles, junk food, secondhand furniture, etc., or the thing people tend to buy more when their income decreases.Hints and Common Errors: Some may think that inferior goods have inferior quality, which may or may not be true. For example, community college class enrollment is not an inferior good. Studies show that when income increases, demand for class enrollments in community colleges and 4-year colleges increasesbecause while some students move from community college to the university, others may enroll in community college classes because they can finally afford these classes. Demand for a good represents the entire market demand for that good (not an individual demand). In addition, some students do take community college classes to complete general education requirements because of its affordability, but it does not mean community college classes have inferior quality.
Read the following sentences and label each one as normative or positive: • "More than 60% of women are in the labor market." • "Rent control laws should be implemented because they help to achieve equity or fairness in housing." • "Society should take measures to end gun violence." • "People who smoke pass on increased medical costs to the whole society." • "Single mothers are more than twice as likely as married mothers to be in poverty."
Positive Normative Normative Positive Positive
Fig 3 Who has the absolute advantage in producing wheat and autos? Who has the comparative advantage in wheat and autos?Who should specialize in the production of each good and how much of it will they make?Now assume that the United States is consuming 30 autos and 15 wheat before trade, and Canada is consuming 50 wheat and 15 autos before trade. Suppose the countries decide to trade 20 wheat for 20 autos. Demonstrate graphically that both countries are better off with trade (think about what that trading scheme leaves for each country to consume and show a point on the graph where they are consuming after trade)
The United States has the absolute advantage in producing autos, and Canada has the absolute advantage in producing wheat. To understand why these two countries trade, we have to compute their comparative advantages. This can be illustrated algebraically by:For the United States: 30 wheat = 60 autos; 1 wheat costs 2 autosFor Canada: 80 wheat = 40 autos; 1 wheat costs ½ auto fig 3.5 United States has the comparative advantage in auto production and Canada has the comparative advantage in wheat production. fig 3.5.5 If they agree to trade 1 bushel of wheat for 1 auto, each country will gain from trade. Canada will specialize in the production of wheat and export wheat. If Canada gets more than ½ auto for each unit of wheat, it gains. The United States will import wheat at a price that is cheaper than what it costs the United States to produce it.
Many goods and services are illegally sold or legally sold but not reported to the government. How would increased efforts to count those goods and services affect our calculation of GDP?
The efforts would increase our measure of GDP because we will be adding in final goods and services that were previously not counted.
Evaluate the following statement: "Trade is like football: one team wins and the other loses."
This is not true. Trade creates value; both sides are better off as a result. Trade, unlike football, is not a zero-sum game. Consider the following example. You and your friend go trick-or-treating. Your friend loves Reese's cups but doesn't care for M&Ms. In contrast, you really love M&Ms and don't really care for Reese's cups. If you trade one of your Reese's cups for one of your friend's M&Ms packets, you are both better off. In fact, you wouldn't bother to make the trade if you weren't made better off. Trade is not like football; in trade, both sides win.
Leisure time is not included in GDP, but what would happen if it was included? Would high-work countries like South Korea fare better in international comparisons of well-being, or worse?
This question is very open-ended. If we included a measure of leisure in GDP, then high work countries would see a decrease in their GDP because leisure is a valuable good consumed by individuals. The greater the amount of work, the less leisure time one has, and since leisure is not being consumed highly in countries like South Korea, we would see their GDP fall.
Why does comparative advantage matter more than absolute advantage for trade?
To make a trade, all you need is for one worker (or country) to have a comparative advantage. Evenif one of the workers has the absolute advantage in both goods, there can still be gains in trade ifeach worker has a comparative advantage. This is most easily seen using an example.Suppose Bert and Ernie can make chocolate chip cookies or lemonade, and the following table indicates the time it takes for each to complete these two tasks: fig 4 Ernie has the absolute advantage in both cookies and lemonade (he's faster at both), but Bert hasthe comparative advantage in cookies (Bert gives up only two glasses of lemonade compared to Ernie's three). Without trade, suppose Bert spends 30 minutes a day baking cookies and 90 minutes a day making lemonade, while Ernie spends 45 minutes a day baking cookies and 75 minutes a day making lemonade. This means that together they produce 1.5 batches of cookies and 8 glasses of lemonade. If they specialize and trade, they can produce 2 batches of cookies and 8 glasses of lemonade, which means they have created an extra one-half batch of cookies. There is value from trade here, even though one person has the absolute advantage in both goods!
According to the New York Times (Nov. 18, 2006), the number of car producers in China is increasing rapidly. The newspaper reports that "China has more car brands now than the US... but while car sales have climbed 38% in the first three quarters of this year, automakers have increased their output even faster, causing fierce competition and a slow erosion of prices." At the same time, Chinese consumers' incomes have risen. Assume that cars are a normal good. Use a diagram of the supply and demand curves for cars in China to explain what has happened in the Chinese car market. (Watch for the double shift!)
When the number of car producers grows rapidly, this increases the supply curve for cars (shifts supply to the right in the car market) which decreases equilibrium prices and increases equilibrium quantity. At the same time, Chinese customers' incomes have risen and cars are a normal good, so demand for cars has risen. So demand has increased which brings up prices some but also increases equilibrium quantity. THIS IS A DOUBLE SHIFT - the outcome of which is that there are many, many more cars being sold and the effect on equilibrium price is unknown.
In the following situations, explain what is counted in this year's GDP: a. You bought a new Wii at GameStop last year and resold it on eBay this year. b. You purchase an Investing for Dummies book at Barnes & Noble. c. You purchase a historic home using the services of a real estate agent. d. You detail your car so it is spotless inside and out. e. You purchase a new hard drive for your old laptop. f. Your physical therapist receives $300 for physical therapy but reports only $100. g. Apple buys 1,000 motherboards for use in making new computers. h. Toyota produces 10,000 new Camrys that remain unsold at the end of the year.
a Not counted since used good sold B Yes, counted as consumption C No - used good D Yes! You purchased a service E Yes - you purchased a new good F The $100 reported would be part of GDP - you purchased a service. $200 is somewhat "illegal" activity. G not included - intermediate good H Yes - part of I in inventory
In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity. a. The price of tacos increases. b. All hamburger sellers raise the price of their french fries. c. Income falls in town. Assume that hamburgers are a normal good for most people. d. Income falls in town. Assume that hamburgers are an inferior good for most people. e. Hot dog stands cut the price of hot dogs.
a. A rise in the price of a substitute (tacos) causes the demand for hamburgers to increase. This represents a rightward shift of the demand curve from D(1) to D(2) and results in a rise in equilibrium price and quantity as the equilibrium changes from E(1) to E(2) (fig 5). b. A rise in the price of a compliment (french fries) causes the demand for hamburgers to decrease. This represents a leftward shift of the demand curve from D(1) to D(2) and results in a fall in the equilibrium price and quantity as the equilibrium changes from E(1) to E(2) (fig 5.5). c. A fall in income causes the demand for a normal good (hamburgers) to decrease. This represents a leftward shift of the demand curve from D(1) to D(2) and results in a fall in the equilibrium price and quantity as the equilibrium changes from E(1) to E(2) (fig 5.5.5). d. A fall in income causes the demand for an inferior good (hamburgers) to increase. This represents a rightward shift of the demand curve from D(1) to D(2) and results in a rise in equilibrium price and quantity as the equilibrium changes from E(1) to E(2) (fig 5.5.5.5). e. A fall in the price of a substitute (hot dogs) causes demand for hamburgers to decrease. This is represented by a leftward shift of the demand curve from D(1) to D(2) and results in a fall in the equilibrium price and quantity as the equilibrium changes from E(1) to E(2) (fig 5.5.5.5.5).
The following sets of statements contain common errors. Identify and explain each error: a. Demand increases, causing prices to rise. Higher prices cause demand to fall. Therefore, prices fall back to their original levels. b. The supply of meat in Russia increases, causing meat prices to fall. Lower prices always mean that Russian households spend more on meat.
a. Demand increases, causing prices to rise. (correct) Higher prices cause demand to fall. (NO - higher prices cause quantity demanded to fall. So the rest of this sentence is just wrong.) b.The supply of meat in Russia increases, causing meat prices to fall. (correct) Lower prices always mean that Russian households spend more on meat. (NOT TRUE - when prices are lower, equilibrium quantity goes up. It could be that price * quantity is higher but it could actually be lower too.)
Answer the following questions to the best of your ability based on what we have learned about GDP and how to "measure" a country's income. a.Switzerland's GDP is much lower than that of India or China, yet Swiss citizens have one of the highest standards of living in the world. If GDP is a good measure of well-being, why is Switzerland's GDP so much lower than India's GDP or China's GDP? b.What measures would be better to compare the well-being of different countries? c.How do you expect these direct measures to correlate with per capita GDP?
a. GDP itself tells very little; Switzerland's GDP is much lower than that of India or China, yet Swiss citizens have one of the highest standards of living in the world. The difference, of course, is population. Switzerland is a small country, so its GDP is relatively small, despite its wealth. The appropriate comparison is per capita GDP.A more interesting question is "Is per capita GDP a good measure of well-being?" Or worded another way: "What constitutes well-being?" b.Well-being can be measured directly in a variety of ways. Students often suggest these:Health careFood EducationThese are certainly better measures than money income, but they can be difficult to collect and interpret. c.Although per capita GDP is not a direct measure of well-being, it can be used as a proxy for direct measures. The wealthiest countries have per capita incomes over 10 times higher than the poorest.
Describe some of the opportunity costs when you decide to do the following. a. Attend college instead of taking a job b. Watch a movie instead of studying for an exam c. Ride the bus instead of driving your car
a. One of the opportunity costs of going to college is the job you give up to go to school. By choosing to go to college, you give up the income you would have earned on the job and the valuable on - the - job experience you would have acquired. Another opportunity cost of going to college is the cost of tuition, books, supplies, and so on. Alternatively, the benefit of going to college is being able to find a better, more highly paid job after graduation in addition to the joy of learning.] b. Watching the movie gives you a certain benefit, but allocating your time (a scarce resource) to watching the movie also involves the opportunity cost of not being able to study for the exam. As a result, you will likely get a lower grade on the exam—and all that that implies. c. Riding the bus gets you where you need to go more cheaply than, but probably not as conveniently as, driving your car. That is, some of the opportunity costs of taking the bus involve waiting for the bus, having to walk from the bus stop to where you need to go rather than parking right outside the building, and probably a slower journey. If the opportunity cost of your time is high (your time is valuable), these costs may be prohibitive.
According to the US Census Bureau, in July 2005 the US exported aircraft worth $1 billion to China and imported aircraft worth only $19,000 from China. During the same month, however, the US imported $83 million worth of men's pants from China and exported only $8,000 worth of pants to China. Using what you have learned about trade as determined by comparative advantage, answer the following questions.a. Which country has the comparative advantage in aircraft production? In pant production? b. Can you determine which country has the absolute advantage in aircraft production? In pant production?
a. US has the comparative advantage in aircraft and China has the comparative advantage in men's pants.
