ECO 102 Assignment 1

Due on February 14 @ 11:59pm

Question 1      (10 marks)

The  country  of  Emmental  has  the  following  firms,  whose  information  is  displayed  in  the accompanying table (in thousands). Assume that no international trade exists and that each firm sells  all  goods/services  either  to  the  population  of  Emmental  as  finished  goods  or  as  an intermediate good to another company.

a.   Find the missing information (in thousands). Show your work.

b.   Find the GDP of Emmental using the value-added approach.

c.   Find the GDP of Emmental by summarizing the finished goods only. Is your result the same as in part b? Why and/why not.

d.   Find the GDP of Emmental using the income approach. Is your result the same as in part b? Why and/why not. Note: business profits are income to business owners in terms of returns to capital.

Question 2      (10 marks)

Suppose coffee and scones are the only two products produced in country Z. According to the information below:

a.   Using 2019 as the base year, find the real GDP and the GDP deflator in both years.

b.   Using 2019 as the base year, find the real GDP growth rate between 2019 and 2020

c.   Using 2020 as the base year, find the real GDP growth rate between 2019 and 2020

d.   Use 2019 as the base year, and assume its CPI is 100. Find the CPI in 2020. Find the inflation from 2019 and 2020.

e.   Using the information in part d, find the real GDP growth rate between 2019 and 2020.

Question 3       (5 marks)

Below   are    the   2024    3rd      Quarter   Canadian    GDP    data   from    the    Statistics   Canada. https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3610010401Find the relevant information of the following parts to the best of your judgement.

Gross domestic product, expenditure-based, Canada, quarterly (x $1,000,000)

Estimates Q3 2024

Durable goods 56,026

Semi-durable goods 26,577

Non-durable goods 98,024

Services 240,426

Non-profit institutions serving households' final consumption expenditure 11,571

General governments final consumption expenditure 164,760

Residential structures 60,589

Non-residential structures 46,169

Machinery and equipment 23,836

Intellectual property products 18,802

Non-profit institutions serving households' gross fixed capital formation 1,065

General governments gross fixed capital formation 32,767

Investment in inventories 24,756

Exports of goods 190,890

Exports of services 54,981

Imports of goods 198,312

Imports of services 54,096

Statistical discrepancy 341

Gross domestic product at market prices 799,172

a.   Find the corresponding components of GDP under the expenditure approach for: C, G, I, and NX

b.   Find the GDP under the expenditure approach. Show that it is consistent with the estimates provided above.

Question 4      (5 marks)

Based on the information below, find your best estimates of the values in the questions.

Household consumption                                                      1800

Household purchase of used cars                                          500

Imports                                                                              900

Government purchases of goods and services                         600

Sales of new homes and apartments                                      450

Sales of existing homes and apartments                                 750

Exports                                                                               450

Government payments to retirees                                          675

Government GST rebate payments                                         300

Household purchases of durable goods                                   900

Household purchases of nondurable goods                              300

Beginning-of-year-inventory                                                   600

End-of-year inventory                                                            900

Business fixed investment                                                      400

Household investment in the stock market                               390

Labor income                                                                      1950

a.   From the above table, estimate the (nominal) GDP. If you exclude any item, provide your reasoning.

b.   What is total expenditure on services?

c.   What is total capital income?

Question 5       (10 marks)

Suppose a typical college or university student spends money primarily on the products in the following table. Use 2019 as the base year to construct a CPI for the students. Assume the 2019 CPI is 100.

a.   Find the cost of the base year basket (cost of living) in 2019. And find the weights of each component in this basket. Which item do you expect to have the largest impact on the students’ cost of living? Explain briefly.

b.   Find the cost of the base year basket (cost of living) in 2020. Find the rate of inflation without finding the CPI. (Hint: we can simply look at the percentage change in the cost of base year baskets)

c.   Find the level of CPI in 2020.

d.   Some analyst argues that as the main food price (pizza) increase by 10% and textbook prices increases by 20%. Students must face a huge rise of burden. Do you agree? Explain.

Question 6       (10 marks)

a.   Use the table on the price of coffee beans and the Consumer Price Index (CPI) to answer the questions. Please round all answers to the nearest whole number.

i.      What is the inflation rate between 2010 and 2011?

ii.      How much percent did the price of coffee bean rise between 2010 and 2011? What are some reasons that this is different from the inflation rate?

b.  Suppose Felix, a recent graduate of University of Toronto School of Medicine, is presented with the following job offers.

i.      Which offer would you advice Felix to accept considering the “real units” or purchasing power?

ii.      Suppose the inflation rate in Toronto, Montreal and Vancouver are 2%, 1% and

3% per year respectively. The salary growth rate at Mount Sinai, Montreal Sacred Heart and Vancouver General are 3%, 1.5%, and 3.5%. Find the real rate of growth of the annual salaries (the approximation method is sufficient).

iii.      Following the previous part, would you revise your advice in part i given the new information? Why and why not.

iv.      Since Felix is searching for job right now, what type of unemployment is he

considered by the Statistics Canada? Or is he not in the labour force? Explain with your reasonings.

v.      Once Felix accepts his offer, how will this impact the unemployment rate in Canada (up or down)? Explain.

Question 7      (10 marks)

Consider the following scenarios and explain how it affects the official unemployment rate.

     a.   Due to AI, many full time jobs a lost, but an equivalent number of part-time jobs are created.

b.   Many high school and university students start to earn part-time income as social media influencers, while before they are full time students without any employment.

c.   As AI replaces many old jobs, these workers are laid off, and they go back to school to develop new skills.

d.   When auto drive becomes more common, former drivers lose their job and stop searching for work.

e.   With the advance of health care technology, more and more people who were unable to work due to long-term illness join the labour force and become employed.

Question 8      (10 marks)

Given the following scenarios, classify whether they belong to frictional, structural, or cyclical unemployment.

a.   Mark, a former accountant, moves to Calgary from Toronto, and look for an accounting position.

b.   Considering the potential 25% tariff by US on Canadian exports, manufacturing firms may have to cut jobs.

c.   The  latest union  strike successfully achieved wage increase for its members. However, potential job seekers now face less openings as the firms have to cut costs by hiring less.

d.   In order to keep up with inflation experienced workers seek higher paying openings more frequently by switching jobs.

Question 9       (5 marks)

The diagram below summarizes the actual unemployment and the natural rate of unemployment (equilibrium  unemployment  rate)  Note:   the  natural  rate   of  unemployment   is  the  rate   of unemployment when the economy is operating in operating in equilibrium, i.e., not in recession nor over heating.

Find the cyclical unemployment rate in 1983, 1993, and 2009. Is the economy in recession or over heating in these years? Explain briefly.

Question 10    (10 marks)

Consider a labour market supply and demand for a local economy. The potential labour force is 6300 people. (Note: the labour supply may not be the same as the potential labour force due to  frictional unemployment.)

a.   Find   the   current   equilibrium   wage   and equilibrium number of workers employed. Is there  any  structural  unemployment  at  this equilibrium?

b.   Compared to the potential labour force, what is  the  currently  unemployment  rate  at  the equilibrium?    What    is    this    level    of unemployment rate referred to as?

c.   Find the frictional unemployment rate at the equilibrium.

d.   Suppose a new minimum wage law stipulates

that the wage rate cannot fall below 11$. How many people will be unemployed? What type of unemployment is this?

e.   Suppose at $11, the potential labour force is 8100 people. Find the structural and frictional unemployment rate.

Question 11    (5 marks)

In year 2000, Jordan has $50,000 for saving. He wants to retire in 2020 years with $1 million dollars.

a.   What is the rate of growth he must achieve on his investment?

b.   Suppose the CPI in 2000, CPI2000  = 100, and the inflation rate is 2% per year. What is the price level in 2020?

c.   Use the year 2000 as the base year, what is the $1 million dollar in $2020 worth in terms of 2000 dollar?

Question 12    (10 marks)

Consider the following production function for a fictional economy: Y = AK0.5L0.5 where K is the capital input and Lis the labour input in terms of number people. Y is the real output. Assume Lis the same as the entire population.

a.   Show that the real  output per capita is: y = AK0.5  where y = Y/L, is the real  output per capita, and K = K/L, is the capital stock per capita. Note: since L is the entire population under the assumption, the real output per capita is the real output per worker, i.e., a measure for labour productivity.

b.   Show that in this set up, there is constant returns to scale in real output (Y) and NOT in output per capita (y).

c.   Suppose K =  100, A=0.5, show that when the population (L) grow from  100 to  1000, the real output per capita falls dramatically. Do you agree that Malthusian trap theory is true in this set up?

d.   Show we can escape Malthusian trap by increasing capital stock (K), Hint: one way is you can  show  that the real  output per  capital may NOT  decrease when population  grows significantly.